Tax on Virtual Digital Asset

Virtual Digital Assets or Crypto-currency or NFTs are the center of attraction in today’s finance world. One gets very eager to learn and trade in these avenues considering their nature of quick and big profits. As we all know, these assets have grown tremendously in value in the last decade.

Among these, the oldest one is Bitcoin founded in 2009 by group of developers using the name of Satoshi Nakamoto. One Bitcoin is worth Rs. 15.50 lakhs as on today having touched an all time high of approx. Rs 55 lakhs last year. This brings into attention the very volatile nature of Virtual Digital Assets.

Considering the fact that these Virtual Digital Assets (VDA) are highly volatile by nature and are not governed by Central Bank of any country in this world but backed only by blockchain technology, Indian Government has very conservative stance for it. Due to this, Tax on transfer of Virtual Digital Asset was introduced in Union Budget of 2022-23 to discourage in some way the use of Virtual Digital Assets in India.

Let us understand taxation of Virtual Digital Asset in detail.

Definition of Virtual Digital Asset(VDA)

Virtual Digital Asset (VDA) loosely referred to as Crypto-currency of NFT is defined under section 2(47A) of The Income Tax Act,1961 as:

1. Any information, code, number or token generated through cryptographic means
2. A non-fungible token(NFT) or any other token of similar nature, by whatever name called.
3. any other digital asset, as the Central Government may, by notification in the Official Gazette specify

Most Common VDAs available in current market:-

1. Bitcoin
2. Ethereum
3. Doge coin
4. Binance Coin
5. Tether
6. NFTs etc

Renowned Companies accepting Bitcoin in World

• Microsoft
• Paypal
• Starbucks
• Home Depot
• CheapAir
• AT&T

Section 115BBH governing the taxation of VDA

As per Section 115BBH of The Income Tax Act, 1961, Income from transfer of Virtual Digital Assets is taxable at flat rate of 30%. This high rate of flat tax also brings our attention to the intention of the government to restrict usage of Virtual Digital Asset in India. Let us understand, how exactly Income from VDA and respective tax will be calculated.

Calculation of Income from VDA

• Proceeds from the transfer of VDA
• Less: Cost of Acquisition of VDA

Calculation of Income Tax

If an individual has traded in VDA during the year, then his income tax will be total of these:-

1. Total Taxable Income Less Income from VDA- to be taxable as per Normal Slab rates plus
2. Income from VDA- taxable at 30%

Important points to note here are

• Set off of loss incurred under any other head of income shall not be allowed from Income from transfer of VDA
• Any expenditure other than Cost of Acquisition shall not be allowed as deduction while computing Income from transfer of VDA
• Loss arising from trading in VDA shall not be allowed to carry forward for set off in next year

Head of Income under which Income from transfer of VDA is taxable

It can be made taxable under any of the below heads based on case to case basis

• Profits and Gains from Business or Profession: It can be taxable as Business income if assesse is treating VDAs as his stock in trade.
• Capital Gain: If the VDAs are treated as investments by assesse, income from it can be assessed as capital Gains. However, in such a case, if VDA is held for more than 36 months, it shall be treated as Long term capital gain and if held for less than 36 months, then as Short term capital gain.

In both the above heads of Income, method of computation of Income from transfer of VDA and Flat tax rate of 30% will remain same, however surcharge may differ as per particular case.

TDS on Transfer of VDA – Section 194S

Government has also introduced section 194S of The Income Tax Act, 1961 to trace transactions relating of transfer of Virtual Digital Assets. This section states that 1% TDS is to be deducted by buyer of Virtual Digital Asset . Payer of Consideration on transfer of VDA can be resident or non resident but payee is to be resident only , otherwise this section is not applicable.

However, in following cases this section is not applicable, if the consideration is paid by:-

1. *Specified Person and consideration does not exceed Rs. 50000 for the financial year
2. Any person other than Specified Person and consideration does not exceed Rs. 10000 for the financial year

*Specified person in this section means:-

1. Individual or HUF not having any business income or
2. Individual or HUF having business income but Turnover/Gross receipts does not exceeding Rs 1 cr in case of business and Rs 50 lakhs in case of profession

Section 194S is made applicable from 01.07.2022. Therefore, an important point to note here is that for F.Y. 2022-23, the consideration of transfer of virtual digital assets in the Period from 1.4.2022 to 30.6.2022 will be counted and considered for determining the threshold limit of Rs. 50,000 or 10,000 (as case may be) in a year, but TDS u/s 194S will not be deducted on such transaction. TDS u/s 194S will be deducted only on consideration for transfer of VDA credited or paid on or after 01.07.2022.

Implications of gifting of VDA

Gifting of Virtual Digital Asset is taxable in the hands of the recipient of the gift under Section 56(2)(x) of The Income Tax Act, 1961 and shall be treated similarly to any property other than immovable property.

The author can also be reached at gandotra.himanshu@gmail.com