Taxation of Virtual digital assets.

Finance Act 2022 introduced a tax on virtual digital assets (VDA).

Ø Section 2(47A) provided a definition of VDA.

A. An Asset satisfying all the below conditions

·         any information or code or number or token (not being Indian currency or foreign currency); AND

·         generated through cryptographic means or otherwise; AND

·         can be transferred, stored or traded electronically; AND

·          i) providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or

·          ii) 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)

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
Thus above  definition includes only crypto-currency & NFT and no other digital gift coupons etc.

Ø  The taxability of VDA has been provided in another newly introduced in Section 115BBH of the Act (Applicable from FY 2022-23), which provides tax rate @ 30% (excluding surcharge and cess) on transfer of VDA. Cost of acquisition shall be allowed as deduction, however no incidental expenses (eg. Brokerage cost) shall be allowed as deduction. 

 

Ø  Loss on sale of VDA shall be adjusted against gain on other VDA e.g. Loss on Dogecoin can be adjusted against the gains made on Bitcoin. Carry forward of loss shall be also be not allowed and therefore, set off is possible only in the current year itself.  Income from VDA is taxed at special rates under Chapter XII of the Act. If a person’s total income comprises solely of income from VDA, then the benefit of unexhausted basic exemption limit is also not extended.

 

Ø  Section 194S provides for the tax deduction on payment of VDA. Tax has to be deducted by the buyer responsible, being a resident person @ 1%.  This may be difficult in case  where VDA traded in exchange as  here there is no interaction between buyer & seller.

 

Ø  Section 56(2)(vii) has been amended to include VDA, pursuant to which any receipt of VDA without consideration or for inadequate consideration by the resident individual would be taxable in the hands of the recipient as per Section 56(2)(x).