Treat NFTs as different from virtual digital assets when it comes to accounting, taxation, and interpretation

By Rameesh Kailasam

A common discussion, amongst many these days, is around non-fungible tokens, more commonly known as NFTs. Most get confused on ‘fungible’ vis-a-vis ‘non–fungible’. From a basic understanding, ‘fungible’ means any asset or good that can be interchanged with other assets or goods of similar type. Money is fungible because whether you have a single 2,000 rupee note or four 500 rupee notes or ten 200 rupee notes or twenty 100 rupee notes, the value is still the same for everyone. Gold, silver, bronze, metals of the same type, are also all fungible, as are other commodities, and even bonds and shares. Cryptocurrencies are also fungible as each unit of a cryptocurrency like bitcoin would be equivalent to another unit of the same.

Non-fungible, on the other hand, means something that is unique and cannot be replaced with something else. NFTs are ‘non-fungible’, meaning they represent a unique underlying asset. Non-fungibility, as a concept in economics, is used to describe things that cannot be replaced or interchanged owing to their unique properties. NFTs are, in simple terms, digital representation of ownership of such an item recorded on a blockchain. An NFT could be a digital or physical asset or anything else which has value.

NFTs and cryptocurrencies are very different from each other; while both are built on blockchain, the similarity ends there. NFTs are everything digital that includes art works, paintings, drawings, music, videos, games, etc. Non-fungibility makes them one-of-a-kind and unique in nature that is not divisible and can’t be readily exchanged.

The NFT frenzy picked up in 2021, with celebrities and brands hopping on to the bandwagon in India, with marquee names like Amitabh Bachchan, Rajnikanth, Salman Khan, among others,. launching their digital NFT collectibles. Internationally, brands like Coca Cola, Pepsi, Hyundai, Adidas, Nike, Samsung, and McDonalds have already entered this space. It is expected that the global NFT market will touch $80 billion by 2025.

While ownership of an NFT can give the owner control over the work, the copyright rests primarily with the creator unless such rights have also been transferred. Therefore, there is an element of copyright and intellectual property also involved. Given their unique characteristics, NFTs can be used as a digital ownership record for authenticating ownership of both digital as well as physical assets. NFTs may be awarded without any monetary considerations, or may be bought and sold using traditional fiat currencies like the INR.

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At their heart, NFTs act as publicly verifiable digital certificates. These certificates can cover an underlying physical asset, digital media or even an individual. This gives NFTs very diverse applications that are unique and distinctive, making them capable of creating multiple socio-economic opportunities. As an engagement tool, as academic certificates, as certificates of authenticity for physical products, as digital tickets, as digital loyalty cards, as virtual fashion, as a CSR tool, as a marketing tool, NFTs have the potential to help solve multiple challenges faced in the financial, digital, and virtual environments.

For instance, the Indian Space Research Organisation (Isro) has partnered with the Indian platform Vyomanaut to reward space enthusiasts with digital collectibles as NFTs. Fans can put their space enthusiasm to test by taking a quiz and win NFTs weekly. Sports, e-sports and institutions with a large fanbase can create new economic opportunities in digital environments like the metaverse. Similarly, chocolate brand Cadbury’s has launched a campaign where parents can upload their children’s artwork that will be converted into a digital collectible in the NFT principle. These NFTs will be sold to sponsor education for underprivileged children.

These instances of socio-economic opportunities essentially highlight the need for deeper engagement between the technology companies and policy formulators in India to create a supportive framework for NFTs in the country. Specifically, it is critical to treat NFTs separately from virtual digital assets for matters of accounting, taxation and interpretation.

Given its large talent pool, India today has the potential and the opportunity to be the market leader in the emerging Web3 space. Countries like Singapore are currently refraining from issuing any regulations for the burgeoning NFT market and are taking a tech-neutral stance. Similarly, in the UK, the government, while regulating cryptos, wants to keep NFTs out, and is intending to mint its own NFTs. Additionally, although the EU’s AML regulatory framework proposes to include “virtual currency exchanges” and “custodian wallet providers”, it did not define regulations specific to NFTs. On top of NFTs enjoying regulatory freedom, courts in Singapore and the UK are recognizing NFTs as assets that need protection like other assets.

In India, there is a need for clarity amongst regulators and government when it comes to NFTs despite the fact that they have been classified as virtual digital assets by the finance ministry, a classification that also includes cryptocurrency. A clear cut understanding of this form will ensure much-needed regulatory certainty while encouraging growth of businesses and start-ups in this domain. India hosts 11 NFT companies, the third-highest globally, but there is a greater opportunity that must be duly explored and capitalised upon.

The author is CEO,