Crypto & NFT Law in India

A quick introduction of the Indian laws relating to the various types of Crypto Assets.

Over the last few months, there have been many discussions (and a lot of confusion) around crypto tax in India. In this post, I will briefly explain all the laws that apply to Cryptos in India.

Some background

Before we begin, let's quickly understand what Non-Fungible Tokens (NFTs) are.

NFTs are digital proof-of-ownership of an underlying asset such as:

• digital art

• collectibles

• domain names

• virtual game items

• physical assets

Cryptos can broadly be divided into 6 types:

1. Non-fiat-backed currencies e.g. Bitcoin (BTC), Monero (XMR)

2. Fiat-backed currencies e.g. Tether (USDT)

3. Utility coins e.g. Ether (ETH), Filecoin (FIL)

4. Governance tokens e.g. Uniswap (UNI)

5. NFTs not backed by tangible assets

6. NFTs backed by tangible assets

Virtual Digital Assets

Categories 1 to 5 are Virtual Digital Assets (VDAs) under section 2(47A) of the Income-tax Act.

Some laws that apply to VDAs are:

1. VDAs come under the definition of "property" under section 56 of the Income-tax Act which relates to "Income from other sources".
   

2. Many transactions in VDAs incur 1% TDS under section 194S of the Income-tax Act titled "Payment on transfer of virtual digital asset". The Government has issued guidelines explaining when TDS applies and when it does not.
   

3. The Government has also issued an order in relation to TDS for transactions other than those taking place on or through an Exchange.
   

4. The Government has also issued a Circular providing some exemptions for the application of section 206AB to TDS on VDA. Section 206AB is titled "Special provision for deduction of tax at source for non-filers of income-tax return".
   

5. Income from VDAs is taxed at 30% under section 115BBH of the Income-tax Act titled "Tax on income from virtual digital assets".

What are not VDAs?

The Government has issued a notification specifying the following are not considered VDAs:

• Gift cards or vouchers

• Mileage points

• Reward points or loyalty card

• Subscription to websites or platforms or application

NFTs backed by tangible assets

The Government has issued a notification specifying that an NFT will not be considered a VDA if it satisfies 2 conditions:

1. The transfer of the NFT results in the transfer of ownership of an underlying tangible asset.
   

2. The transfer of ownership of such underlying tangible assets is legally enforceable.

Annexure

Section 2(47A) of the Income-tax Act

[(47A) "virtual digital asset" means—

(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;

(b) a non-fungible token or any other token of similar nature, by whatever name called;

(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify:

Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.

Explanation.—For the purposes of this clause,—

(a) "non-fungible token" means such digital asset as the Central Government may, by notification in the Official Gazette, specify;

(b) the expressions "currency", "foreign currency" and "Indian currency" shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);]

Section 2 (clauses (h), (m), and (q) of the Foreign Exchange Management Act

(h) currency includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank;

(m) foreign currency means any currency other than Indian currency;

(q) Indian currency means currency which is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934 (2 of 1934);