Virtual Digital Assets

The Finance Minister in her Budget 2022 speech announced a 30% tax on income from virtual digital assets (particularly aiming at Cryptocurrencies). In addition to this, it was also proposed to levy a Tax Deduction at Source (TDS) on payments made in relation to the transfer of virtual digital assets at 1% above a monetary threshold.

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What are Virtual Digital Assets?

In layman’s terms, it basically means cryptocurrencies, DeFi (decentralised finance) and non-fungible tokens (NFTs). Prima facie, excludes digital gold, central bank digital currency (CBDC) or any other traditional digital assets, and hence aimed at specifically taxing cryptocurrencies.

Read in details about Cryptocurrency in the linked article.

How does the government define virtual digital assets?

• A new clause (47A) is proposed to be inserted to section 2 of the Finance Act, in order to define “virtual digital asset”.
• According to the Finance Act, “virtual digital asset” means any information, code, number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise and can be called by whatever name. 
• They provide 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 schemes and can be transferred, stored or traded electronically.
• Non-fungible tokens and; any other token of similar nature are included in the definition.

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What is the Reason Behind Taxation of Virtual Digital Assets?

• Popularity and Increased Transactions – Virtual digital assets have become immensely popular in recent times, and the magnitude of trading in such digital assets has increased substantially.
• Growing Market – This has resulted in the emergence of a market where payment for the transfer of a virtual digital asset can be made using another such asset. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.
• Gifting Culture – The gifting of virtual digital assets is also a popular mode of exchange nowadays.

Learn about Draft National Strategy on Blockchain in the linked article. 

How are Virtual Digital Assets different from Digital Currency?

• Currency – medium of exchange can be defined as currency only if it is issued by the central bank. e.g. dollar, rupee etc. Hence, crypto will be called a currency only when it will be issued by the central bank.
• Digital Currency – What the RBI will issue in the next fiscal, beginning 1 April, will be the digital currency. This digital currency will be called a ‘digital rupee’.
• Virtual Digital Asses – Anything which is created outside of the central bank are virtual digital assets created by individuals. People, in general, refer to these digital assets as cryptocurrency, but actually, they are not. E.g. Bitcoin.
  • These private virtual currencies do not represent any person’s debt or liabilities, as there is no issuer. They are not money and certainly not currency. 
  • Virtual Digital Assets also include Non-fungible tokens or NFTs, which are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. NFTs can also be used to represent individuals’ identities, property rights, and more. 
  • Fungible tokens, like cryptocurrencies, are generally identical to each other and, therefore, can be used as a medium for commercial transactions, unlike NFTs.

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What are the recent regulations regarding virtual digital assets?

The government, in the budget of 2022, has announced certain regulations for the Virtual Digital Assets, with effect from 1st April 2023.

• It was announced that the government will be taxing the profits which are made during transactions of such private created assets or virtual digital assets at 30%.
• This will be done regardless of any long-term or short-term holding by the investor.
• No deduction on expenditure or allowance shall be allowed while computing such income, except the cost of acquisition.
• TDS will be imposed on payments for the transfer of crypto assets at a rate of 1% for transactions over a certain threshold.
• If a virtual digital asset investor incurs losses during the transaction, it can’t be set off against any other income.
• The gifting of virtual digital assets has also been proposed to be taxed in the hands of the recipient.

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Conclusion

The RBI for a very long time has been deliriously opposing private cryptocurrencies, as their implications on national security and financial stability could be serious. This recent step taken by the government recognises crypto as a legitimate asset class and crypto trading as a legitimate activity. But the higher rate of taxation clearly indicates that RBI wants to reduce the appeal towards this virtual digital asset. Thus, the announcement addresses the unreliability and concerns on the legal, regulatory and tax status of cryptocurrencies to a reasonable extent. A well-regulated crypto ecosystem will pave the way for the right environment for innovation.

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