What is Virtual Digital Asset? Virtual Digital Asset meaning
Virtual Digital Assets are digital representations of value that can be traded, transferred, or used for payments and investments. Indian currency has been specifically excluded from the definition of VDA under the IT Act, 1961.
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VDAs include cryptocurrencies like Bitcoin and Ethereum to digital tokens used in online games, NFTs of digital art, etc. VDAs are stored electronically and can be traded or
transferred over the Internet without the need for physical exchange.
As per section 2(47A) of the Income Tax Act 1961, VDA is defined as
“Any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing 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 scheme; and can be transferred, stored or traded electronically”.
VDA specifically excludes the following Instruments
3. Google Pay / Paytm rewards, any other Points earned as rewards.
4. Amazon Prime, Netflix subscriptions, etc
How does VDA Work
Digital assets rely heavily on cryptography and blockchain technology. Let us
understand the exact meaning of the following terminologies.
Cryptography: It refers to the process of Encoding messages so that only the intended recipient can access it thus preventing Unauthorised Parties from reading messages.
For Example:-
Original Message —-> Encryption Key (Encryption) —> Unreadable Message—
—> Transmitted —-> Decryption Key (Decryption) —-> Back to Original Message
Blockchain Technology: It’s a Decentralized Digital Ledger that securely records transactions across multiple computers. Each transaction forms a “block” linked to the previous one, creating a “chain” that ensures data integrity and transparency, making Tampering nearly impossible.
Crypto-Currency: It is a virtual currency that is secured by Cryptography, making it nearly
impossible to Counterfeit. There is no central authority to regulate such crypto-currencies. Famous crypto-currencies include Bitcoin, Ethereum, etc.
NFT: Non-Fungible Token is a unique digital asset that represents Ownership of virtual items such as art, collectibles, or media. Unlike regular money, each NFT is unique and can’t be traded equally. NFT can be created by any person using crypto-exchange as its medium.
Taxation of VDA
1. Mr. A is a Seller of a NFT of a digital painting.
2. The Cost of acquisition for Mr. A is Rs 4 Lakhs.
3. Mr. B is the Buyer. B is purchasing NFT from A for 10 Lakhs.
In this case Income from VDA for Mr A is Rs 6 Lakhs.
Mr. A. (Seller ) ——-> Exchange
Intermediary ——> Mr. B (Buyer)
Income Tax calculation for Mr. A :
The Income of Mr. A (Seller) while selling NFT to Mr. B. is taxable at a flat tax rate of 30%. The tax upon VDA is chargeable upon the Income portion, not the sale value. No
deductions are allowed except for the cost of acquisition.
Sale value 10 Lakhs
Cost of Asset (4 Lakhs)
Income 6 Lakhs.
IT Payable (30% of 6 lakhs) 1.8 Lakhs
Intra-head and inter-head set-offs are not permitted.
Consequently, Mr. A can neither offset the profit of Rs. 6 lakhs against losses from other heads nor against losses from other VDAs.
Indexation benefits are also not available in case of profits from VDA. If the VDA transactions had proceeded without Exchange interference, Mr. B would have had a TDS liability of deducting 1% TDS on the payment of consideration to Mr. A. However, in our case, a transaction takes place through exchange so the responsibility for deducting TDS lies with Exchange.
As per section 194S of the Income Tax Act, transactions having transfer of VDAs exceeding Rs. 50,000 in a year are liable to deduct TDS at a rate of 1%.
If VDA assets are sold regularly as a business, profits are taxed as such. Mr. A should declare his VDA income in ITR-3 as Business income.
If VDAs are held as capital assets, the income is taxed as “Capital Gains” for long-term investments. Mr. B should report this in ITR-2.
Note: Whether Mr A classifies his income under Business
income or any other income, the tax rate is applicable in India
is at a flat slab of 30%.
GST on VDA
The Income classification from VDAs, similar to gambling income, is under consideration. In the future, it is expected that VDA income will attract a 28% GST on the entire transaction
value.
Other important points:
Specified persons include:
a. Individual / HUF having No PGBP income; Or
b. Individual / HUF having a business turnover less than or equal to 1 Crore; Or
c. Individual / HUF having Professional receipts less than or equal to 50 Lakhs.
2.. TDS remittance date for such specified persons is 30 days from the end of the month of
deduction in Form 26 QE, as against the 7th month of next month for others. Virtual Digital Assets (VDAs) are included under Section 56(2)(x) of the Income Tax Act, which
3. Pertains to gift provisions. Consequently, if VDAs are transferred without consideration, the Gifting provisions become applicable.
4. CBDT has recently issued guidelines regarding TDS deduction. It has clarified that if “Exchange” is involved in a VDA transaction, then the liability of TDS deduction lies upon the exchange and not the buyer or seller. The Primary intention of shifting TDS compliance responsibility was to ensure the applicability of TDS provisions.
5. It is to be noted that the GST amount is not to be included in the calculation of the TDS deduction amount. Also, when the transactions are being carried out through the payment gateway then the Payment gateway is not liable for deducting TDS.
If the consideration of the VDA transaction is another VDA then, in such case both the parties become Buyer. In such a case, Exchange is liable for deducting TDS from both parties.
CBDT:- Central Board of Direct Taxes
PGBP:- Profit and Gains of Business or Profession
HUF:- Hindu Undivided Family
NFT:-Non-Fungible Token
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