- Introduction
- What are Virtual Digital Assets?
- VDAs Vs Digital Currency
- Classification of Virtual Digital Assets
- Taxation under head Capital Gains , Business Income and Income from Other Sources
- Treatment of Losses
- TDS Deduction u/s 194S
- Illustrations
Introduction
Cryptocurrencies, also known as virtual digital assets have emerged as one of the most talked-about subjects of the twenty-first century. In 2009, Mr. Satoshi Nakamoto created Bitcoin, which was the first cryptocurrency to enter circulation. Since then, several cryptocurrencies, such as Bitcoin cash and Dogecoin, have been introduced. Even a small number of products, like Libra, could soon be available.
According to current figures, India has the largest global population of cryptocurrency owners. Until last year, there was no regulation limiting the movements of these cryptocurrencies in India. The Finance Act, 2022, introduced the rules governing the selling and acquisition of cryptocurrencies in India. As per the new provisions introduced by the Finance Act, 2022, any transfer of Virtual Digital Assets on or after 1st April, 2022, shall be taxable.
What are Virtual Digital Assets?
Section 2(47A) defines VDAs as-
- 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;
- Non-fungible Token (NFT) or any other token of similar nature, by whatever name called;
- Any other digital asset, as the Central Government may, by notification in the Official Gazette specify.
In short, the VDA shall mean a cryptocurrency, NFT or another virtual digital asset as notified by the Central Govt. However, subscriptions to any OTT platform, mobile applications, e-commerce platforms, etc. are not covered by it.
The Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of a virtual digital asset subject to such conditions as may be specified therein. Such powers might have been given to the Central Govt. to exclude India’s first digital currency or Central Bank Digital Currency (CBDC).
VDAs V/s Digital Currency
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Currency |
Digital Currency
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Virtual Digital Assets
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Only money issued by the central bank qualifies as a medium of exchange such as the dollar, rupee, etc. Therefore, a cryptocurrency will only be referred to as a currency if it is issued by the central bank. |
The digital money is what the RBI will issue in the upcoming fiscal, which will start on 1 April. This virtual money will be known as a “digital rupee.” |
Anything produced independently of the central bank is a form of a virtual digital asset made by an individual. Although most people call these digital assets “cryptocurrency,” they are not such as Bitcoin. Since there is no issuer, these private virtual currencies do not represent any person’s debt or liabilities. They are not currency, nor are they money. Non-fungible tokens, also known as NFTs, are cryptographic assets on a blockchain having particular identifying numbers and metadata that make them apart from one another. They are often referred to as virtual digital assets. NFTs can be used to represent a variety of things, including people’s identities and property rights. In contrast to NFTs, fungible tokens are generally similar to one another and can therefore be utilized as a medium for economic transactions. |
Classification of Virtual Digital Assets
There was no clarification from the government as to whether the virtual digital assets will be viewed as currencies, commodities, or securities. Until there is clarification, the virtual digital asset should be classified as capital assets.
According to Section 2(14) of the Income Tax Act, a capital asset means property of any kind held by a person, whether or not connected with his business or profession. The term “property” has no legal definition, but it refers to any kind of interest that a person would be able to obtain, hold or enjoy.
As a result, cryptocurrencies or NFTs should be considered capital assets if purchased for investment purposes by taxpayers. Therefore, any gain resulting from the transfer of such assets will be taxable as capital gains. However, if the taxpayer’s transactions in such assets are substantial and frequent, it should be assumed that the taxpayer is trading in such assets. In this case, the proceeds from the sale of such assets should be taxed as business income.
Taxation
under the head capital gains, business income, and income from other sources.
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Capital Gains (Section 115BBH)
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Business Income
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Income from Other Sources
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If virtual digital assets are classified as Capital Assets, gains arising from the transfer of such assets shall be further classified into long-term and short-term based on the period of holding of such assets. If a virtual asset is held for more than 36 months from the date of purchase, it is classified as a long-term capital asset; otherwise, it is classified as a short-term capital asset.
No deduction is to be allowed for any expenditure or allowance As per Section 115BBH(2)(a), no deduction shall be allowed in respect of any expenditure (other than the cost of acquisition )or allowance or set off of any other loss shall be allowed to the assessee under any provisions of this Act while computing Income from Capital Gains.
Tax Rates on Capital Gains According to Section 115BBH(1), income arising from the transfer of VDAs shall be taxed at the rate of 30% plus applicable surcharge and cess. Therefore, irrespective of the fact whether the gain arising from VDA is short-term or long-term shall be taxed at the flat rate of 30% along with applicable surcharge and cess. Furthermore, no deduction or exemption under Chapter VI-A or Section 54F shall be allowed on such capital gains. Section 87A relief, on the other hand, is available. |
If the taxpayer engages in significant and frequent transactions in virtual digital assets, it should be assumed that the taxpayer is trading in such assets. Income from the sale of such assets should be taxable as business income in this case. Gains (before deducting any expense or allowance) will be taxed at a flat rate of 30% plus applicable surcharge and cess |
Section 56(2)(x) applies when a person receives a benefit worth more than Rs. 50000 or receives any gift without any consideration or inadequate consideration. As a result, the Finance Act, 2022 proposes to include VDAs within the definition of movable property. Thus, receiving VDAs as a gift/benefit for no or inadequate consideration and the value of such gift/ benefit exceeds Rs.50000, it shall be taxed under Income from Other Sources.
Tax Rates Benefits arising from VDAs referred to under section 56(2)(x) are not taxed at 30% rate; instead, such income is taxed in accordance with the provisions applicable to the assessee. However, if the recipient transfers such assets again, the resulting gains are taxable under Section 115BBH.
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Treatment of Losses
In accordance with Section 115BBH, losses incurred from the transfer of one VDA can be set off against gain from another VDA only. Furthermore, losses arising from the transfer of VDAs are not allowed to be set off against any other income under this Act, and they cannot be carried forward to succeeding assessment years.
For example, short-term capital loss arising from the transfer of Bitcoin (cryptocurrency) can be set off against short-term capital gains arising from the transfer of an NFT.
TDS Deduction u/s 194S
During the course of the implementation of the Finance Act,2022, a new section 194S was introduced which established a provision for the deduction of tax from the payment of consideration for the transfer of VDAs. This provision becomes effective on 1 July 2022.
Section 194S’s abridged provisions are explained below:
Deductor | Any person responsible for paying any sum by way of consideration for the transfer of a virtual digital asset. |
Deductee | Any Resident Person |
TDS Rate |
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Time of Deduction | At the time of payment or credit in the account of the resident whichever is earlier. |
Amount on which Tax is deductible | Gross amount of consideration paid to the resident person for the transfer of virtual digital assets. However, the deductor shall ensure that tax has been paid in the following cases before releasing the consideration where the sum is paid:
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Threshold Limit | Rs.50000 – For the following specified persons:
1.HUF/ Individual not having any income from business or profession.
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Overriding effect | If tax is deductible under this section, no tax shall be deducted or collected under any other provision of this Act. For example, if tax is deductible under both Sections 194O and 194S, the provisions of Section 194S will take precedence. |
Additional Points | 1.TAN is not mandatory for TDS deduction under this Section.
2.Section 206AB of the Act (Special provision for deduction of tax at source for non-filers of income-tax return) shall not apply in the case of specified persons for the purposes of this Section. |
Illustrations
Illustration 1: Long-Term Capital Gains
Solution:
Loss on Sale of 1500 NFT can be set off against the gains arising from the sale done on NFT /Ether on 31-3-2023 or 1-5-2022 respectively.
Therefore, net gain of Rs.2800000 shall be taxable at the rate of 30% as Long Term Capital Gains(LTCG).
Note:
Net Profit/Loss= Sales Consideration-Brokerage- COA
*Before 1-4-2022
Taxable Profit/Loss= Sales Consideration-Indexed COA-Brokerage **After 1-4-2022
Taxable Profit/Loss= Sales Consideration-COA
*The benefit of indexation shall be allowed because Section 115BBH shall be applicable from the
assessment year 2023-24.
**No deduction shall be allowed for the brokerage or indexation of the cost of the acquisition. Sales consideration less cost of acquisition shall be taxable under the head capital gains.
Illustration 2: TDS u/s 194S
Jyotsana Thareja
Chartered Accountant
Fields of Interest: Direct Tax, Indirect Tax, International Tax