IT Department To Question the Sharp Decline in NFT Prices

A recent decline in the prices of the high-value Non-Fungible Tokens (NFTs), and the recently aligned tax framework, might lead to tax scrutiny for Indian investors in the upcoming months. This is because the asset valuation norms concerning digital assets remain unclear, as per tax experts.

In a few cases, buyers could have purchased NFTs via cryptocurrencies such as Bitcoin but sold them in rupees. According to tax experts, such transactions could face tax scrutiny in the upcoming months.

The tax department will soon be questioning the sharp decline in the valuation of these virtual digital assets. The department could scrutinise NFT-related transactions based on suspicion that some money could have been accepted via cash to reduce tax outgo. A seller may find it challenging to convince that the sale was fair to the IT officials due to a significant decline in NFT prices.

The 2022-23 Union Budget introduced a 30% tax on all gains earned via the sale of virtual digital assets and a deduction of a 1% tax at source on all crypto-related transactions. The government is yet to define NFTs and if they would come under the definition of virtual assets for charging the 1% TDS. Also, in several instances, people who purchased NFTs paid via cryptocurrencies, so what happens when they sell it from a taxation point of view is also unclear.

According to industry experts, a few of the NFTs could have declined in their valuation since there is a lack of utility concerning the underlying asset. In India, crypto-assets (including NFTs) have recorded a decline in the number of transactions since the beginning of April.

For any clarifications/feedback on the topic, please contact the writer at bhavana.pn@cleartax.in