This article is written by Shephali Jha pursuing an Introduction to Practical Contract Drafting. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho).
This article has been published by Sneha Mahawar.
Introduction to digital assets
The highest number of crypto owners in the world is Indians. The NGO ‘NASSCOM’ in collaboration with cryptocurrency exchange platform ‘WazirX’ has reported a significant growth in the Crypto-Tech industry in India. The anticipation is that Indians will be investing around 241 million dollars in the Crypto market in the next 10 years. Consequentially, the Reserve Bank of India is all set to launch and adopt the Digital Currency or Digital Rupee. Selling and trading of digital assets/currency markets are open every day for 24 hours. A market that is extremely unstable and volatile. Yet, has become significantly popular and successful. The two of the biggest crypto have more worth than six of the biggest Indian stocks (combined). Every country has defined the scope of virtual digital assets. Therefore, in India, a cryptocurrency and NFT have been notified by the Central Govt. OTT platforms, mobile applications, e-commerce platforms, etc. subscriptions will not fall under the ambit of Virtual Digital Assets.
Classification of digital assets
The Financial Budget of 2022-2023 has been ambiguous of whether a virtual digital asset is a security, currency, or commodity whereas the West has been comprehensible on the same. Therefore, in the light of such perplexity, the virtual digital asset should be deemed as capital assets when the taxpayer has purchased them for investment purposes. Section 2(14) of the Income-tax Act explains that a capital asset is a property belonging to a person, irrespective of the connection of that property with his business or profession. This property can be of any kind and its scope has not been limited under this section.
Concluding it can be classified as:
– Capital Gains
– Business Income
– Other Sources (gifts etc.)
When virtual digital assets are transferred from one person to another for a short-term period or long-term period and there are gains or losses in such transactions then it shall be taxable as ‘Capital Gains’. To determine whether the income from the sale of assets is taxable or not under Business Income are is when the transactions of virtual digital assets are substantial and frequent. If the taxpayer has got digital assets of value exceeding 50,000 Rupees without any consideration or as a gift then it shall be taxed under gifts of Income Tax Act.
Taxation of digital assets in the USA
Cryptocurrency is regarded as a property and not currency. The tax depends on Short Term and Long-Term Capital Gains as well as income tax brackets.
|Term of Capital Gains||Time Period||Taxation Rates|
|Short-term Capital Gains||Income on assets that are held for less than a year||10% to 37%|
|Long-term Capital Gains||Taxes on assets that are held for a period longer than a year.||0% to 20%|
The Losses incurred from trading of such Virtual Digital Assets can be used to offset capital gains as well as deduct up to $3,000 off your normal income tax depending on the time period of possession of assets. Any additional losses can be carried forward to the next tax year.
Evolution of taxation on digital assets in India
|2013||The Reserve Bank of India (RBI) cautioned the public against the use of virtual currencies. The bank sent a message to the users, holders, and traders of virtual currencies. The circular issued was regarding the potential financial, operational, legal, customer protection, and security-related risks involved in transactions via Virtual Digital Assets.|
RBI and the finance ministry warned that virtual currencies are not a legal tender. Public Interest Litigations (PILs) were filed in the Supreme Court seeking a ban on buying and selling of cryptocurrencies in India. Another PIL was filed asking for them to be regulated.
The Government of India presented the bill ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’. The scope of the act was to impose a complete ban on all crypto-related activities including mining, buying, holding, selling, and dealing.
|2020||The Supreme Court of India lifted the curb on cryptocurrency imposed by RBI. Therefore, banks and financial institutions were permitted to provide access to banking services to those involved in transactions in crypto assets.|
|2022||The Finance Bill, 2022 has proposed to amend Income Tax Act, 1961 and impose taxes on Virtual Digital Assets.|
Implications of Budget 2022
In the Union Budget 2022, the Government of India has finally decided to regulate the transactions of Virtual Digital Assets. A list of provisions has been proposed which will be applicable from the assessment year 2023-24 in the Income-tax Act, 1961 to regulate investments in cryptocurrencies, NFTs or other virtual digital assets. On or after 01-04-2022 transactions with respect to Virtual Digital Assets shall be taxable.
Finance Bill, 2022 has proposed to insert a new clause (47A) to Section 2 of the Income Tax Act, 1961. The clause defines ‘Virtual Digital Assets’ as follows:
(47A) “Virtual Digital Assets” means ––
- Any information or code or number or token
- Which does fall under an Indian currency or foreign currency
- Generated through cryptographic means or otherwise, by whatever name called.
- Objective is to provide a digital representation of value exchanged with or without consideration
- Involving 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
- This is not limited to investment scheme; and can be transferred, stored or traded electronically.
- Non-fungible Token (NFT)
- Or any other token of similar nature and properties
- With whatever name it is referred to.
- Central Government will be reserving the rights to add more technologies into Virtual Digital Assets
- By notification in the Official Gazette.
Rate of taxation and explanation under various heads:
Section 115BBH will be inserted in the Income Tax Act, 1961 explaining the taxation on income from virtual digital assets.
The income that arises from the transfer of virtual at certain time intervals can be taxed under the head of Capital Gains as follows:
|Term of Capital Gains||Time Period||Taxation Rate|
|Short-term Capital Gains||If a virtual asset is held for less than 36 months from the date of purchase||30%|
|Long-term Capital Gains||If a virtual asset is held for more than 36 months from the date of purchase||30%|
Explanation of Section 115BBH(2)(a) that provides that no deduction is allowed:
- Expenditure attracted because of the transfer of a virtual digital asset
- Allowance or set-off of any loss to the assessee
- Under Chapter VI-A: Income Tax Returns cannot be filed.
- Under Section 45F: Allows tax exemption on the long-term capital gains earned from selling a capital asset, other than a house property. Not applicable to Virtual Digital Assets.
Example: A sold a capital asset like shares, bonds, jewellery, gold, etc. and reinvest the sale proceeds towards the purchase or construction of a house property, the returns earned on the sale of the capital asset would be allowed as an exemption from tax under Section 54F.
- Cost of improvement relating to a virtual digital asset;
- Indexation of cost of acquisition of a virtual digital asset;
Although, Relief under Section 87A can be claimed. Tax Rebate to individual taxpayers if their total income is less than 5,00, 000. Surcharge Rates are also applicable in Capital Gains depending on the type of Taxpayer and Type of Capital Gain. The nature of income can be Long-term capital gain, Short-term Gains or any other income. The Type of Taxpayer can be Individual, HUF (Hindu Undivided Family), AOP (Associate of Persons), BOI (Body of Individuals), AJP (Artificial Judicial Persons), Firm/Local Authority, Firm/Local Authority, Domestic Company falling under Section 115BAA or 115BAB (Corporate Tax Reduction for Domestic Companies), Other Domestic Company, Foreign Company, Co-operative Society opting for section 115BAD, Other co-operative society.
When the transactions related to virtual digital assets are in considerable quantity and frequent, then it’s understood that the taxpayer is involved in trading such assets. Income generated from such form of transactions in the market after selling assets will be taxable under the head of ‘Business Income’. The gains shall be calculated without deduction of any expense or allowance shall be taxable at the flat rate of 30%. An additional surcharge and cess cost shall be added along with the taxation of Business Income gains which is varying according to the category of Taxpayer.
The Finance Bill, 2022 includes virtual digital assets under of movable assets of the Income Tax Act, 1961. This has been covered under Section 56(2)(x) and the scope of the same is when any person receives any benefit (virtual digital asset) without consideration (as a gift) whose value exceeds Rs. 50,000 to or from an Individual/HUF. The deemed income under this provision shall be taxed if the following essentials are met in the course of the transaction.
- Without consideration;
- Inadequate consideration;
Such income shall not be taxed at 30% under Section 115BBH because it does not arise due to the transfer of a virtual digital asset. However, when the recipient further transfers such assets, the resultant gains shall be taxable under Section 115BBH. The taxation of gifting of Virtual Digital Assets shall be according to the taxation rates on gifts as notified by the Government of India annually.
Tax deduction at source in virtual digital assets
Insertion of Section 194S in Income Tax Act, 1961
Tax is required to be deducted under section 194S stating that any person responsible for paying any sum by way of consideration for the transfer of a virtual digital asset is required to deduct tax at source if the amount is payable to a resident person. Such Tax is deducted at the rate of 1% of the consideration. Surcharge and Health & Education Cess shall not be added. If the person making transaction does not furnish Permanent Account Number (PAN) then under 206AA(1)(iii) TDS shall be deducted at the rate of 20%. In circumstances where the consideration for transfer of Virtual Digital Assets can be as following:
- Wholly in kind
- In exchange for another Virtual Digital Asset
- Partly in cash and kind but if the cash part is not sufficient for tax liability
Then, the person responsible for paying such consideration shall, before releasing the consideration, ensure that tax has been paid in respect of such consideration for the transfer of virtual digital assets. The provisions of sections 203A and 206AB will not apply to a specified person.
When and who are excluded from TDS
No tax shall be deducted under this provision in the following circumstances.
- If the consideration aggregate value does not exceed Rs. 10,000 during the financial year by any person (other than a specified person).
- If the consideration aggregate value does not exceed Rs. 50,000 during the financial year payable by the specified persons.
How will the losses incurred on virtual digital asset be taxed
Section 115BBH(2)(b) explains how the losses will be taxed can be explained as follows:
- It prohibits to set-off losses from virtual digital assets as evaluated under Section 115BBH(1)(a) against income computed under any other provision of the Income Tax Act. For Example, short-term capital loss arising from the transfer of Bitcoin (cryptocurrency) cannot be set-off against short-term capital gains arising from the sale of listed shares.
- No loss occurring from the transfer and transaction of Virtual Digital Assets is allowed to be carried forward in the succeeding assessment years.
- Similarly, the long-term capital loss from the sale of NFTs cannot be set-off against the long-term capital gains from the sale of mutual funds.
- The losses from one virtual digital asset will not be allowed to be set-off from the gains from another virtual digital asset. For example, short-term capital loss arising from the transfer of ApeCoin (cryptocurrency) cannot be set-off against short-term capital gains arising from the transfer of Bitcoin or an NFT.
- Investors of Virtual Digital Assets will be required to evaluate taxation for every different Virtual Digital Asset.
Example 1 (TDS of Virtual Digital Assets)
Mr. Ranbir Kapoor sells his Bitcoins for a Car. Following is an example of how the TDS will be deducted.
|Date of Sale or Exchange||17.05.2022|
|Nature of Transaction||Car|
|PAN of payee available||YES|
|Payer is a specified person||YES|
|TDS||1% of 25,90,000 = 25,900|
- TDS is not applicable, if the transaction was done before 01.04.2022.
- TDS is not applicable, if the consideration is less than Rs. 10,000.
- TDS is not applicable because the payer is a specified person, as well as the consideration, is less than Rs. 50,000.
- Under Section 206AA of Income Tax Act, 1961, if PAN of the payee is not available then the rate of TDS is 20%.
- If the consideration is not CASH like in the above example, then before releasing the consideration, the deductor shall ensure that tax has been deducted and paid in respect of such consideration.
Example 2 (Capital Gains from Cryptocurrency)
Ms. Alia Bhatt has purchased 60,000 Bitcoin (cryptocurrency) at Rs. 67 each on 10 August, 2017. The capital gains from the transfer Bitcoin made at different dates for different shall be computed as under:
|Date of selling||01-03-2022||01-04-2022||31-03-2023|
|Net Profit or Loss||4,56,860||5,42,140 (loss)||16,55,640|
|Taxable Profit or Loss||2,79,789||5,40,000 (loss)||16,60,000|
Conclusion, confusion and the future of digital assets in India
The Indian Government has not provided with any laws which be governing, regulating or prohibiting the transaction in Virtual Digital Assets. This is why an inference can be made that it is not illegal to transact cryptocurrencies or set up any cryptocurrency exchange in India. Although, Finance Act, 2022 have classified Virtual Digital Assets as Cryptocurrency and Non-Fungible Tokens and provided taxation rated of the same. They have also reserved the right to increase the scope of Virtual Digital Assets.
India is not the first country to impose taxes on Virtual Digital. Reserve Bank of India has informed that India’s first Central Bank Digital Currency (CBDC) project will be launching ‘The Digital Rupee’. This Digital Currency or the Digital form of rupee will be completely regulated by the Reserve Bank of India as well as remain the guarantor of the Digital Rupee. Although taxing Virtual Digital Assets does not make them legal as under the Income Tax Act, 1961 tax is levied even on illegal incomes and undisclosed incomes. Therefore, Indian Government will be levying taxes on income from Virtual Digital Assets from 1st April, 2022.
- Understand the Taxation of Virtual Digital Asset – Taxmann
- Taxation of Virtual Digital Assets- Cryptos and NFTs (taxguru.in)
- (2) Taxation Of Virtual Digital Assets – An Attempt To Decipher The Proposed Law | LinkedIn
- Is taxation of virtual digital assets the advent of cryptocurrency regulation in India? (scroll.in)
- Taxation of Virtual Digital Assets (caclubindia.com)
- Taxation of cryptocurrencies in Europe: an overview – Osborne Clarke | Osborne Clarke
- Microsoft Word – FINAL FINANCE BILL,2022 without border (indiabudget.gov.in)
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