Taxation of Virtual Digital Assets (VDAS)

SYNOPSIS

Learning Objectives

Introduction
Section 2(47A): Definition of Virtual Digital Assets (and its Understanding)
Taxability of Virtual Digital Assets till 31/3/2022
Taxability of Virtual Digital Assets after 31/3/2022 Section 115BBH: Tax on the Income From VDAs
Understanding of Section 115BBH
Transfer of VDAs for the Consideration
VDAs Lost or Stolen
Transfer of VDAs by Employer to Employee
Transfer of VDAs Without Consideration or for Inadequate Consideration
Section 194S: TDS on the Payment of Consideration for the Transfer of VDAs

Learning Objectives

To understand the meaning and definition of Virtual Digital Assets (VDAs)
To understand how incomes from VDAs will be taxed u/s 115BBH
To understand tax implications when VDAs are transferred by one person to another

To understand implications of TDS u/s 194S on incomes of VDAs

1. INTRODUCTION

In the first and the second quarter of 2020, people were confined to home as a consequence of pandemic which provided them time to look for the many existing opportunities in the other phases of life, Crypto currency, which is one of the virtual digital assets, being the front runner in such case.
The Finance Act, 2022 has introduced separate provisions to address taxation of transactions in the virtual digital asset (VDA) by amending provisions of the Income tax Act, 1961.
The finance Act, 2022introduced a new Flat Rate scheme for taxation of income arising from transfer of Virtual Digital Asset (VDA) WEF AY 2023-2024 i.e., PY 2022-2023. Every transaction of transfer of VDA on or after 1/4/2022 shall be covered under this scheme.
Under this scheme of taxation of VDA, the following provisions have been introduced
Section 2(47A): Meaning of VDA
Section 115BBH: Method of computation and tax rates for the income arising from the transfer of VDA
Section 194S: TDS on the payment of consideration on the transfer of VDA
Section 56(2)(x): VDAs shall be regarded as movable property.

2. SECTION 2(47A): DEFINITION OF VIRTUAL DIGITAL ASSETS (AND ITS UNDERSTANDING)

Clause	DEFINITION U/S 2(47A)	UNDERSTANDING
(a)	Virtual Digital Assets means: \u00b7 any information or code or number or token \u00b7 not being Indian currency/CBDCs/foreign currency \u00b7 generated through cryptographic means \u00b7 providing a digital representation of value exchanged with or without consideration \u00b7 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 \u00b7 can be transferred, stored or traded electronically	(1) Cryptography is the science of protecting information by converting it into secured format. This may also be known as encryption of the data. This is essential to ensure the privacy and protection of data. (2) Many platforms provide discount coins to customers for using their services or for buying goods from them which can be used by them to buy some other goods or for availing services from them. Even though these coins have value still shall not be treated as crypto assets as they are not capable of being transferred or traded.
(b)	a non-fungible token or any other token of similar nature, by whatever name called	(1) The word Fungible means something which can be substituted, i.e., it is capable of being substituted. (2) Non fungible means that it is unique and it cannot be replaced with something else. (3) Non-Fungible tokens (NFTs) are associated with digital files such as photos, videos and audios from the field of arts, sports, entertainment and other collectibles. (4) Not all NFTs are VDAs but only those NFTs which are notified by the government will be regarded as VDAs. [Explanation to the Section 2(47A)]
(c)	any other digital asset, as the Central Government may, by notification in the Official Gazette specify	(1) This is a residual clause which gives power to the government to notify any other VDAs in the definition.
Proviso to the Section 2(47A): Virtual Digital Asset Excludes
(a)	Indian currency	Central Bank Digital Currency (CBDC) has been included in the definition of bank notes and thus this is also an Indian Currency and not a VDA Note: CBDC is a digital or virtual currency but it is not comparable to private virtual currencies
(b)	Foreign currency	Any currency other than Indian currency is a foreign currency
Currency: Currency includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers\u2019 cheques, letter of credit, bills of exchange, promissory notes, credit cards and other similar instruments. Thus, crypto-currencies are not currencies, whether Indian currency or foreign currency
Notification dated 30/6/2022: Virtual Digital Asset Excludes
(1)	Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services
(2)	Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services
(3)	Subscription to websites or platforms or application

3. TAXABILITY OF VIRTUAL DIGITAL ASSETS TILL 31/3/2022

The inclusive definition of \u2018Income\u2019 u/s 2(24) covers all sorts of income
Even illegal income is also subject to tax
Express provisions or mention of VDAs was absent
Income was considered to be taxable under the head ‘PGBP’, where VDAs were held as a business commodity or as stock in trade
Income was considered to be taxable under the head \u2018Income from Other Sources\u2019 if it was not taxed as PGBP income
There was no separate applicable tax rate for VDA income, the same was taxed at normal tax rates applicable to the tax payer

4. TAXABILITY OF VIRTUAL DIGITAL ASSETS AFTER 31/3/2022 SECTION 115BBH: TAX ON THE INCOME FROM VDAs

SUB-SECTION	SECTION 115BBH
(1)	On the Income earned from the transfer of any VDA, income tax shall be charged @ 30%
(2)	While calculating income from transfer of any VDA \u00b7 Its cost of acquisition will be allowed to be reduced. \u00b7 Following shall not be allowed to be reduced \u00d8 Any expenditure or allowance \u00d8 Any kind of loss from the income of VDA \u00d8 Loss on transfer of VDA is neither allowed to be set off nor allowed to be carry forwarded
(3)	For VDA, whether held as capital asset or not, the term Transfer shall have the same meaning as defined in Section 2(47)

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5. UNDERSTANDING OF SECTION 115BBH

(a)

Section 115BBH gives the manner in which income from transfer of VDA is to be computed and tax rate on such income.

(b)

Section 115BBH has not mentioned the head under which such income shall be chargeable to tax.

(c)

As per the ordinary understanding, Income of VDAs shall be classified under either of

(a) Profits and Gains from Business and Profession (PGBP) or

(b) Income from Capital Gains or

(c) Income from other sources

Note: No amendment has been done in section 2(24) [definition of Income], section 28 [incomes taxable as PGBP income] and section 45 [incomes taxable as capital gains]

(d)

Taxable under PGBP: When a person holds VDA for the sale in the ordinary course of the business, the profit should be taxable under PGBP. Thus, income of the trader of cryptocurrency shall be taxable as PGBP income.

Further where VDAs (specially cryptocurrencies) are airdropped (distributed without monetary compensation) to the influencers to increase the visibility of VDAs, by the virtue of Blog, Tweet, Post/Reel on the social media then the FMV of such VDAs airdropped shall be taxable in hands of the recipient either u/s 28(iv) and further TDS provisions u/s 194R shall also apply.

(e)

Taxable under Capital Gains: When a person is not holding VDA for the sale in the ordinary course of the business then such VDA can be classified as a \u201cProperty\u201d in the definition of Capital asset u/s 2(14) and thus income from transfer shall be regarded as income of capital gains.

If virtual digital assets are hold by assessee for more than 36 months from date of purchase, it will be treated as long term capital gain, otherwise as short-term capital gain. In either of the case tax rate shall be 30% plus surcharge and HEC.

(f)

Taxable under Income from Other Sources: If VDAs are transferred without consideration then it will be taxable for the recipient as Income from other sources u/s 56(2)(x).

(g)

Though, income from transfer of VDA is taxable as PGBP income or Income of Capital gains, will not make any difference as to the tax rate, still the differentiation is required for the purposes of calculation of interest Section 234C. In case of failure to pay advance tax on short estimation or non-estimation of capital gains then interest u/s 234C is not payable.

(h)

Computation of Income taxable u/s 115BBH

Particulars	Amount in `
Full Value of Consideration (FMV of VDAs)	Allowed
Less: Cost of Acquisition (system of indexation is not allowed)	Allowed
Less: Cost of improvement	Not Allowed
Less: Expenses of any kind in relation to transfer of VDAs	Not Allowed
Less: Set off of any kind of loss	Not Allowed
Less: Brought Forward of Loss	Not Allowed
Less: Depreciation	Not Allowed
Less: Exemption u/s 54F	Not Allowed
Less: Deductions u/s 80C to 80U under Chapter VI-A	Not Allowed
Capital Gains or PGBP Income	Allowed

Tax Rate

\u00b7 Tax on such Capital Gains or PGBP Income shall be calculated at the rate of 30% plus surcharge and plus HEC.

\u00b7 No basic exemption limit (as per slabs) shall be allowed.

\u00b7 No transfer of deficiency to basic exemption limit shall be fulfilled from such amount of capital gains

\u00b7 Rebate u/s 87A shall be allowed.

6. TRANSFER OF VDAs FOR THE CONSIDERATION

Income from VDAs is taxable only when such income arises from the transfer of VDA and such transfer is as per section 2(47) as is related to capital assets.
Thus, it could be argued that income from VDAs will be taxable only when VDAs are held as capital assets as defined u/s 2(14).
However, as per section 115BBH(3) it has been clarified that income from transfer of VDAs will be computed as per the this section whether it is covered under the head of PGBP or Capital Gains or Income from other sources.
If VDAs are transferred for the consideration then income shall be calculated and taxed as per section 115BBH but if VDAs are transferred without consideration then it will be taxable for the recipient as Gift u/s 56(2)(x) or as PGBP income u/s 28(iv).

7. VDAs LOST OR STOLEN

If VDAs are lost or are stolen then

No capital loss shall be allowed if VDAs are held as Capital Assets.
PGBP loss can be computed u/s 29 if VDAs are held as stock in trade.

8. TRANSFER OF VDAs BY EMPLOYER TO EMPLOYEE

If VDAs are provided by the employer to employee as part of emoluments then it will be taxable for the employee as perquisites u/s 17(2)
If VDAs are provided by the employer to employee as gift and value are more than `5,000 then it will be taxable for the employee as perquisites but if the value of less than or equal to `5,000 then it will be exempt for the employee
If VDAs are sold by the employer to employee at consideration which is equal to FMV of such VDAs then it will be taxable for the employer u/s 115BBH

9. TRANSFER OF VDAs WITHOUT CONSIDERATION OR FOR INADEQUATE CONSIDERATION

If VDAs are transferred without consideration then there will be no tax treatment for the transferor as it is not regarded as a transfer u/s 2(47) but it will be taxable for the recipient under the head of PGBP u/s 28(iv) or Capital Gains u/s 56(2)(x).
The meaning of movable asset has been amended from the AY 2023-2024 and now it includes VDAs. Thus, after amendment Movable Assets Means
Shares and securities
Jewellery
Archaeological collections
Drawings
Paintings
Sculptures
Any work of Art
Bullion
Virtual Digital Assets
The limit of `50,000 shall apply in case of gifts from non-relatives and in case of relatives it will be fully exempt, irrespective of its value.
Other exemptions as discussed in the chapter of Gifts shall also apply.
All of the above provisions shall apply only when VDAs form a capital asset in the hands of the recipient.
For the recipient of VDAs as gift, cost of acquisition shall be
If VDAs form a capital asset in the hands of the recipient: The cost of acquisition will be the cost of VDAs to the previous owner u/s 49(1)
If VDAs form a capital asset in the hands of the recipient: The cost of acquisition will be the cost as determined u/s 145A and ICDS-II, Valuation of inventory.

10. SECTION 194S: TDS ON THE PAYMENT OF CONSIDERATION FOR THE TRANSFER OF VDAs

Payer

Any person, resident or non-resident, who is responsible to for paying any sum as consideration for the transfer of VDAs

\u00b7 If a person is buying VDA then such person is liable to do TDS

\u00b7 If VDAs are transferred on the exchange platforms (like Binance, Coinbase Exchange, FTX, OKX, KuCoin, Gate.io, Huobi Global, Kraken, Binance US, Bitfinex, Crypto.com Exchange) then such exchange facilitates the sale without revealing identity of the buyer and seller. In such case, such Exchange is liable to do TDS since it is the person liable to make payment of the consideration.

\u00b7 If above mentioned exchange is facilitating the trade by connecting buyer and seller then buyer has to do TDS since it is he who is liable to make payment of the consideration.

\u00b7 If credit/payment is between Exchange and broker and the sale is through a broker (and the broker is not seller), the responsibility to do TDS shall be on both the Exchange and the broker. However, if there is a written agreement between the Exchange and the broker that broker shall be doing TDS on such credit/payment, then broker alone may do TDS.

Payee

Any resident person

Income

TDS has to be done on the consideration of the transfer of VDAs which can be wholly in cash, wholly in kind or in exchange of another VDA or partly in cash and partly in kind. In such case where the consideration for transfer of VDA is\u2014

(a) wholly in kind or in exchange of another VDA and where there is no part in cash or

(b) partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of TDS amount

then the person responsible for paying such consideration shall, before releasing the consideration, ensure that amount of TDS has been paid, relating to consideration for the transfer of VDA

Rate of TDS

\u00b7 TDS has to be done @ 1% (without Surcharge and HEC)

\u00b7 If the payee has not submitted his PAN to the payer, then the rate of TDS shall be 20%

\u00b7 If the payee is non filer of ITR and payer is a specified person then rate of TDS shall be 1% but if payer is not a specified person, then rate of TDS shall be as per section 206AB

\u00b7 If both, Section 206AA and Section 206AB are applicable then rate of TDS shall be the rate higher of the two rates given in those sections

Time of TDS

TDS shall be done at the earlier of

(a) Credit to the account of the payee

(b) Making payment to the payee

Monetary Exemption limit

Payer	Limit for the turnover	Monetary exemption limit in `
Individual/HUF NOT engaged in business or profession (called as specified person)		50,000
Individual/HUF engaged in business or profession and has turnover less than or equal to a limit (called as specified person)	Turnover of preceeding PY </= `100 lakhs in business Turnover of preceeding PY </= `50 lakhs in profession	50,000
Individual/HUF engaged in business or profession and has turnover more than a limit	Turnover of preceeding PY > `100 lakhs in business Turnover of preceeding PY > `50 lakhs in profession	10,000
Company		10,000
Firm / LLP		10,000
Any other person		10,000

Note: This section comes into the force from 1/7/2022 but the limit of `10,000 / `50,000 shall be calculated from 1/4/2022

Note: Giving VDAs as gift or in case of lending of VDAs, no TDS shall be done since it is not a transfer of VDAs.

Note: Specified person as referred above shall not require TAN (tax deduction/collection account number) for doing TDS but will have to mention PAN in the challan and TDS statements/returns

Multiple Sections

\u00b7 If the transaction is covered u/s 194-O as well as section 194S then TDS shall be done u/s 194S

\u00b7 If the transaction is covered u/s 194-O and u/s 206C(1H) as well as u/s 194S then TDS shall be done u/s 194S and other sections will not apply

\u00b7 Without going into the merit whether VDA is goods or not, once TDS is done u/s 194S, TDS would not be required to be done u/s 194Q

Illustration: Mr. J who is resident of India, having age of 45 years, has earned income from salary of `1,80,000, interest income from savings account `20,000 and income from transfer of VDA of `45,000 which is held by him as a capital asset. Compute his tax liability for the AY 2023-2024 i.e., PY 2022-2023.

Solution: Calculation of the Total income of Mr. J for the AY 2023-2024 i.e., PY 2022-2023

Particulars	Amount in `
Income from salary	1,80,000
Income from house property	NIL
Income from PGBP	NIL
Income from capital gains (transfer of capital asset)	45,000
Income from other sources	20,000
Gross total income	2,45,000
Less: deductions u/s 80TTA	10,000
Total income	2,35,000
Tax on income of VDA u/s 115BBH @ 30% on `45,000	13,500
Tax on normal income of `1,90,000 at slab 1	NIL
Total tax	13,500
Less: Rebate u/s 87A	12,500
Tax after rebate	1,000
Add: health and education cess @ 4%	40
Tax liability	1,040

Illustration: Mr. J who is resident of India, having age of 45 years, has business loss of `10,00,000, interest income from savings account `50,000 and income from transfer of VDA of `2,50,000 which is held by him as a capital asset. Compute his tax liability for the AY 2023-2024 i.e., PY 2022-2023.

Solution: Calculation of the Total income of Mr. J for the AY 2023-2024 i.e., PY 2022-2023

Particulars	Amount in `
Income from salary	NIL
Income from house property	NIL
Income from PGBP	(10,00,000)
Income from capital gains (transfer of capital asset)	2,50,000
Income from other sources	50,000
Gross total income	3,00,000
Less: deductions u/s 80TTA	10,000
Total income	2,90,000
Tax on income of VDA u/s 115BBH @ 30% on `2,50,000	75,000
Tax on normal income of `40,000 at slab 1	NIL
Total tax	75,000
Less: Rebate u/s 87A	12,500
Tax after rebate	62,500
Add: health and education cess @ 4%	2,500
Tax liability	65,000

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SYNOPSIS

Learning Objectives

Introduction

Section 2(47A): Definition of Virtual Digital Assets (and its Understanding)

Taxability of Virtual Digital Assets till 31/3/2022

Taxability of Virtual Digital Assets after 31/3/2022 Section 115BBH: Tax on the Income From VDAs

Understanding of Section 115BBH

Transfer of VDAs for the Consideration

VDAs Lost or Stolen

Transfer of VDAs by Employer to Employee

Transfer of VDAs Without Consideration or for Inadequate Consideration

Section 194S: TDS on the Payment of Consideration for the Transfer of VDAs

Learning Objectives

1. INTRODUCTION

2. SECTION 2(47A): DEFINITION OF VIRTUAL DIGITAL ASSETS (AND ITS UNDERSTANDING)

Virtual Digital Assets means:

\u00b7 any information or code or number or token

\u00b7 not being Indian currency/CBDCs/foreign currency

\u00b7 generated through cryptographic means

\u00b7 providing a digital representation of value exchanged with or without consideration

\u00b7 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

\u00b7 can be transferred, stored or traded electronically

(1) Cryptography is the science of protecting information by converting it into secured format. This may also be known as encryption of the data. This is essential to ensure the privacy and protection of data.

(b)

a non-fungible token or any other token of similar nature, by whatever name called

(1) The word Fungible means something which can be substituted, i.e., it is capable of being substituted.

(2) Non fungible means that it is unique and it cannot be replaced with something else.

(3) Non-Fungible tokens (NFTs) are associated with digital files such as photos, videos and audios from the field of arts, sports, entertainment and other collectibles.

(4) Not all NFTs are VDAs but only those NFTs which are notified by the government will be regarded as VDAs.

[Explanation to the Section 2(47A)]

(c)

any other digital asset, as the Central Government may, by notification in the Official Gazette specify

(1) This is a residual clause which gives power to the government to notify any other VDAs in the definition.

Indian currency

Central Bank Digital Currency (CBDC) has been included in the definition of bank notes and thus this is also an Indian Currency and not a VDA

Note: CBDC is a digital or virtual currency but it is not comparable to private virtual currencies

(b)

Foreign currency

Any currency other than Indian currency is a foreign currency

Currency: Currency includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers\u2019 cheques, letter of credit, bills of exchange, promissory notes, credit cards and other similar instruments.

Thus, crypto-currencies are not currencies, whether Indian currency or foreign currency

Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services

(2)

Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services

(3)

Subscription to websites or platforms or application

3. TAXABILITY OF VIRTUAL DIGITAL ASSETS TILL 31/3/2022

The inclusive definition of \u2018Income\u2019 u/s 2(24) covers all sorts of income

Even illegal income is also subject to tax

Express provisions or mention of VDAs was absent

Income was considered to be taxable under the head ‘PGBP’, where VDAs were held as a business commodity or as stock in trade

Income was considered to be taxable under the head \u2018Income from Other Sources\u2019 if it was not taxed as PGBP income

There was no separate applicable tax rate for VDA income, the same was taxed at normal tax rates applicable to the tax payer

4. TAXABILITY OF VIRTUAL DIGITAL ASSETS AFTER 31/3/2022 SECTION 115BBH: TAX ON THE INCOME FROM VDAs

On the Income earned from the transfer of any VDA, income tax shall be charged @ 30%

(2)

While calculating income from transfer of any VDA

\u00b7 Its cost of acquisition will be allowed to be reduced.

\u00b7 Following shall not be allowed to be reduced

\u00d8 Any expenditure or allowance

\u00d8 Any kind of loss from the income of VDA

\u00d8 Loss on transfer of VDA is neither allowed to be set off nor allowed to be carry forwarded

(3)

For VDA, whether held as capital asset or not, the term Transfer shall have the same meaning as defined in Section 2(47)

5. UNDERSTANDING OF SECTION 115BBH

Section 115BBH gives the manner in which income from transfer of VDA is to be computed and tax rate on such income.

(b)

Section 115BBH has not mentioned the head under which such income shall be chargeable to tax.

(c)

As per the ordinary understanding, Income of VDAs shall be classified under either of

(a) Profits and Gains from Business and Profession (PGBP) or

(b) Income from Capital Gains or

(c) Income from other sources

Note: No amendment has been done in section 2(24) [definition of Income], section 28 [incomes taxable as PGBP income] and section 45 [incomes taxable as capital gains]

(d)

Taxable under PGBP: When a person holds VDA for the sale in the ordinary course of the business, the profit should be taxable under PGBP. Thus, income of the trader of cryptocurrency shall be taxable as PGBP income.

(e)

Taxable under Capital Gains: When a person is not holding VDA for the sale in the ordinary course of the business then such VDA can be classified as a \u201cProperty\u201d in the definition of Capital asset u/s 2(14) and thus income from transfer shall be regarded as income of capital gains.

If virtual digital assets are hold by assessee for more than 36 months from date of purchase, it will be treated as long term capital gain, otherwise as short-term capital gain. In either of the case tax rate shall be 30% plus surcharge and HEC.

(f)