Last updated: August 29th, 2024 3:10 PM

Scheme for Taxation of Virtual Digital Assets (Cryptocurrencies & NFT)

The amount of cryptocurrency transactions has dramatically increased. Provisions were adopted to describe such assets, allow for the taxes of income flowing from transactions in such assets, and TDS provisions in order to bring clarity to the taxation of such assets.  As a result, Scheme for Taxation of Virtual Digital Assets (Cryptocurrencies & NFT) have been devised, such as:

• Profits from the sale of virtual digital assets such as bitcoin, NFT, and other similar assets would be taxed at a base rate of 30%.
• The profit would be computed as the sales consideration minus the acquisition cost.
• Other than the cost of acquisition, no other expenses would be allowed as a deduction.
• Losses from any other source cannot be offset against virtual digital asset income.
• Losses incurred as a result of the sale of a virtual digital asset cannot be offset against other sources of revenue.
• Losses incurred as a result of digital assets cannot be carried forward.

Virtual Digital Assets

Virtual Digital Assets, particularly cryptocurrencies and Non-Fungible Tokens (NFTs), have grown in popularity in recent years, and the volume of cryptocurrency trading has increased significantly. To bring clarity to the taxation of such assets, provisions were introduced to define such assets, provide for the taxation of income arising from transactions in such assets, and TDS provisions.

Definition of Virtual Digital Assets - Section 2(47A)

The definition of Virtual Digital Assets is proposed to be introduced into section 2 of the Income Tax Act via new clause 47A, which defines Virtual Digital Assets as assets that have the following characteristics: i)  Any data, code, number, or token (other than Indian currency or foreign currency) ii) Produced by cryptographic means or otherwise, under whatever name it is known, iii) Providing a digital representation of value exchanged for or against consideration, iv) with the promise or representation of inherent value, or functions as a store of value or a unit of account, including but not limited to investment schemes v) and can be transferred, stored, or traded electronically. Furthermore, the term includes non-fungible tokens (NFTs) and any other token of a similar sort. The term "NFTs" refers to digital assets that have been approved by the government. In addition, the Central Government has been given the authority to designate any additional virtual digital asset as a virtual digital asset by publication in the Official Gazette. In addition, the Central Government has the authority to declare certain assets not to be regarded as virtual digital assets for the purposes of the proposed section.

Taxation of Income arising from transactions of Virtual Digital Assets - Section 115BBH

A new section, section 115BBH, is proposed to be included, which allows for a flat rate of 30% tax on revenue derived from the transfer of Virtual Digital Assets (plus applicable surcharge and cess). "Where an assessee's total income includes any income from the transfer of any virtual digital asset, the income tax payable is the sum of the amount of income tax calculated at a rate of 30% on income from the transfer of any virtual digital asset and the amount of income tax with which the assessee would have been charged had the assessee's total income been reduced by the aggregate of the income from the transfer of any virtual digital asset." Aside from the cost of acquisition, no deduction for expenditures or allowances, or set-off of any loss, shall be permitted when calculating the income (gain) derived from the transfer of the Virtual Digital Assets. Furthermore, losses from virtual digital asset transactions can only be offset against gains from virtual digital asset transactions and cannot be offset against any other income. Furthermore, such a loss may not be carried through to later evaluation years. This change will become effective on April 1, 2023, and will apply to the assessment year 2023-24 and following assessment years.

TDS for the transfer of a virtual digital asset - Section 194S

To broaden the tax base from transactions involving these assets, it is suggested to add section 194S to the Act, which would provide for a 1% tax deduction on payments made for the transfer of a virtual digital asset to a resident. However, no deduction will be required if the consideration paid during the financial year does not exceed ₹50,000/- (in the case of a specified person) or  ₹10,000/- (in the case of a non-specified person) (in any other case). For the purposes of section 194S, a Specified Person is defined as

1. An individual or a HUF whose total sales/gross receipts in the fiscal year immediately preceding the fiscal year in which such virtual digital asset is transferred do not exceed  ₹1 crore (in the case of a business) or  ₹50 lacs (in the case of a profession).
2. an individual or HUF who receives no income under the heading "Profit and gains of business or profession.”

When the consideration is entirely in kind or in exchange for another virtual digital asset, there is no part in cash; or when the consideration is partly in cash and partly in kind, but the cash portion is insufficient to meet the liability for a tax deduction in respect of the entire transfer, the person paying such consideration must ensure that the tax has been paid before releasing such consideration.

1. Payments made by a particular individual will be exempt from the provisions of Sections 203A (Tax deduction and collection number) and 206AB (Higher TDS rates for non-filers of ITR).
2. The section further states that once the tax has been deducted under section 194S, no other TDS/TCS provision applies to the transaction. Where tax is deductible under both section 194-O and proposed section 194S, tax is deducted using section 194S rather than section 194-O. This modification will go into effect on July 1, 2022.

Gifts of Virtual Digital Assets Are Taxable

Virtual digital assets are included in the definition of "property" under Section 56(2)(x). As a result, any gift of more than 50,000 (unless in certain circumstances) would be taxable in the hands of the digital asset's recipient. This change will become effective on April 1, 2023, and will apply to the assessment year 2023-24 and following assessment years. Click here to learn more about Crypto Tax in India: Taxation On Cryptocurrency