Key Takeaways:
- NFT Airdrops will be taxed in India under Section 56(2)(x) of the Income Tax Act, 1961, starting 1 April 2022.
What is an Airdrop in Web3 space?
Cryptocurrency businesses have revamped the well-known marketing strategy of giving some kind of freebies to get the adoption wheel going. In the crypto world, they are known as Airdrops. Cryptocurrency businesses and projects send coins or tokens to the wallet addresses of the community. Usually, these coins are free or require a small task from the community to spread the word about the new projects.
In simple terms, Airdrops can be compared to a free sampling of a newly launched consumer product, let’s say a new soap. The soap brand gets new users to try the product and spread the word among their friends and family. It’s a win-win model. Users get a free sample for their own use, and the Brand gets word of mouth (hopefully positive).
Types of Airdrops:
1. Standard Airdrops – These are the ones explained above. While they are free, the recipient is required to complete a simple task(s) to promote the newly launched virtual asset. For example – Tweet on Social media, Sign-up for a newsletter etc.
2. Exclusive Airdrops – In some cases, Airdrops are given as rewards to only select loyal holders of a cryptocurrency. These are called exclusive airdrops and do not require any further promotional activity to be done by the recipient. Think of this as reward points given to a loyal customer of a shopping mart.
3. NFT Airdrops – Like Cryptocurrency, holders of Non-Fungible Tokens (NFTs) may also receive NFT as airdrop in their wallets. These, again, are nothing but promotional or marketing activities by a brand.
Are Cryptocurrency or NFT Airdrops Taxable in India?
The short answer is Yes.
While the newly introduced provisions on taxing income from the transfer of virtual digital assets under Section 115BBH of the Income Tax Act introduced via Finance Act, 2022 do not explicitly mention Airdrops. Still, it is reasonable to assume it to be Gifts of Cryptocurrency coins or Tokens or NFTs and will thus be liable to taxation under Section 56(2)(x) and Section 28(iv) of the Income Tax Act.
How will Airdrops be taxed in India?
Section 56(2)(x) of the Income Tax Act, 1961 considers gifts of sums of money, immovable properties, and specified movable properties to be taxable as Income from Other Sources in the hands of the person receiving these gifts. Vide Finance Act 2022, the definition of ‘property’ in Section 56(2)(x), has been amended to now also include ‘virtual digital assets’.
Airdrops received by Individuals
Accordingly, Airdrops of virtual digital assets (Cryptocurrency or NFTs) received by an individual starting 1 April 2022 will be taxable (if the aggregate value of gifts received by the assessee exceeds Rs 50,000 in the financial year). Further, this income will be taxable at the standard income tax rate applicable to the assessee.
Airdrops received by Influencers/Celebrities
In specific cases with respect to Influencers/Celebrities, where VDAs (Crypto, NFTs etc.) are airdropped to influencers (Offline/social media platforms) to promote the project/coin/token, the market value of such VDA shall be taxable in the hands of the influencer under Section 28(iv) of the Income Tax Act which clearly states that the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of a profession is chargeable to tax as business income. Further, this income from airdrops for the influencer will be chargeable to tax at standard tax rates as applicable to each category of taxpayer.
However, in both the cases mentioned above, when the recipient of the Airdrops further transfers such assets, the gains shall be taxable under Section 115BBH at 30% (plus applicable Surcharge and Cess) as per the newly introduced provisions of the Finance Act 2022
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