With the end of FY-23 as of 31st March, it marked another fiscal year in which crypto traders had to pay taxes on incomes from “Virtual Digital Assets” (VDAs). Introduced in the Union budget for FY-22, with the Government officially categorising digital assets, including cryptocurrencies as VDAs. As per the income tax regime, income from the transfer of such VDAs has been made taxable at a 30% tax rate. In FY-22, taxes collected upon transfer of VDAs amounted to Rs 157.9 crore. This is a clear indication that the market is in its nascent stages in the Indian economy and has growth potential. Providing opportunities for investment, trading, and transactions to the people. Thus, it becomes important to discuss the framework of taxation on the income generated from the transfer of VDAs.
Virtual Digital Assets – The Law
To add provisions for VDAs, Section 2(47A) was inserted in the Income Tax Act 1961 via the Finance Act 2022. According to it, the term VDA includes:
- any information or code or number or token (not being Indian currency or foreign currency)
- NFTs or similar tokens
- Other digital assets that the Central Government may notify to be VDAs
Such information, code, number or token under Section 2(47A)(a):
- Can be generated through cryptographic means or otherwise
- Should provide a digital representation of value exchanged with or without consideration
- Have the promise or representation of having inherent value
- Can also function as a store of value or a unit of account (including its use in any financial transaction or investment, but not limited to investment schemes)
- Is capable of being transferred, stored or traded electronically
The section also provided in the same definition, that the Central Government holds the power to exclude any asset from the definition of VDAs through a notification. In 2022, through notifications no. 74 and 75, the CBDT excluded certain assets from the definition of VDAs. These exclusions are:
- Gift cards or vouchers that can be used to obtain goods/services or discounts on goods/services
- Mileage points, reward points, or loyalty cards (without direct monetary consideration) that can be used to obtain goods/services or discounts on goods/services
- Website, platform or app subscriptions
NFTs whose transfer results in a legally enforceable transfer of ownership of an underlying tangible asset.
Notably, the Central Bank Digital Currency (CBDC) issued by the RBI, i.e. the Digital Rupee or e-RUPI introduced in 2021, does not qualify as a VDA, since it is the digital version of our sovereign currency and hence non-taxable as a VDA. It functions as a digital voucher delivered through a QR code or an SMS string that can be issued only by RBI-authorized bodies and is used to facilitate one-time contactless and cashless – voucher-based modes of payments.
Taxation of Virtual Digital Assets in India
The insertion of Section 115BBH to the Income Tax Act made income from the transfer of VDAs taxable at a 30% rate with a surcharge and cess. Only the cost of acquisition is deductible, and no other expenses are eligible for deduction. Exemptions like sections 80C or 80D are also inapplicable.
However, individuals with total income below Rs 5,00,000/- can claim a rebate of up to Rs 12,500 under section 87A. While losses from VDA sales must be declared, they cannot be offset against other forms of revenue like salaries or interest earnings.
The high rate and lack of any deductions or exemptions for taxation on profit from the transfer of VDAs indicates the government’s intention to discourage investments in these volatile avenues.
Determining the Tax Category for VDA Income:
Income generated from VDA can be subject to taxation under two distinct categories: business income or capital gains. When completing Schedule VDA for tax reporting, it is essential to accurately select the appropriate category for taxation.
When holding VDAs as capital assets, similar to how equity shares or mutual funds are held, income generated is categorized as “Capital Gains” for taxation purposes. This is true if VDAs are held for personal short-term or long-term investment purposes, instead of being actively traded or utilised for business objectives. One cannot use indexation for tax calculation regardless of whether VDAs have been held as long-term capital assets.
On the other hand, the income is categorized as “Business Income” (Profits and Gains of Business or Profession – PGBP) if VDAs are being used for active trading or business purposes. While the tax rates are the same for both business income and capital gains, the classification is crucial for calculating interest under section 234C. This section becomes relevant in cases of delayed advance tax payments. If one underestimates or fails to estimate the accrual of capital gains and there is a shortfall in advance tax payment, that shortfall is ignored when computing interest under Section 234C.
Depending on how VDA income is classified, the appropriate Income Tax Return form must be chosen. The form ITR-2 pertains to VDA income filed as capital gains while the form ITR-3 pertains to VDA income designated as business income.
Reporting VDA Income in the ITR
All income resulting from transfers of VDAs must be reported within “Schedule VDA” of the relevant ITR form (ITR-2 or ITR-3, depending upon the category). Schedule VDA mandates the inclusion of specific information, including the date of acquisition, date of sale, classification (capital gains or business income), the cost of acquisition, and the proceeds obtained from VDA sales.
If the VDA was received as a gift and was exempt for the recipient, the cost of acquisition is based on the previous owner’s acquisition cost. However, if the VDA’s value was taxable to the recipient under Section 56(2)(x) upon receipt, that value is considered the cost of acquisition.
What To Expect?
The rapid ascent of VDAs, which encompass cryptocurrencies and NFTs – has transformed the financial landscape and presents intricate challenges to tax regimes. The complexity around the classification and volatility of these assets makes taxation difficult. In response to the apparent challenges it poses to fiat currencies, income from the transfer of VDAs has been taxed at a heavy 30%.
As the government faces an ongoing challenge between balancing innovation, economic growth, and tax enforcement in navigating the taxation of virtual digital assets; one can only hope for a reduction in the 30% tax rate in the coming years.
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