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Everything You Need to Know About Virtual Digital Assets and Their Taxation
The increasing adoption of virtual digital assets (VDAs) for both transactional purposes and income generation in India has necessitated the development of a clear taxation framework. Recognizing this need, the Indian government introduced a structured taxation system for VDAs through the Finance Act, 2022. This provision, which came into effect on April 1, 2022, has significant implications for both individuals and businesses functioning within the digital asset space. So, if you have any virtual digital asset, you need to report its details in your ITR-2 and ITR-3 under schedule VDA. This guide will help you understand more about Virtual Digital Assets and their taxation.
Latest Update
The Income Tax Department has started sending notices to those who have skipped reporting under schedule VDA or misreported gains in AY 23-24 or AY 24-25.
So if you have -
- Misreported crypto income
- Skipped schedule VDA
- Claimed wrong deductions
File ITR-U (updated) for AY 23-24 & AY 24-25 and avoid further consequences. File ITR-U Now!
What are Virtual Digital Assets (VDAs)?
To understand the tax implications, we first need to define Virtual Digital Assets (VDAs). These are essentially digital representations of value, including popular cryptocurrencies like Bitcoin and Ethereum, as well as NFTs. You can trade, transfer, or use them for various financial activities. In India, VDAs gained significant attention after the 2022 Union Budget, which introduced a taxation framework to clarify how profits from these assets would be taxed. However, the regulatory environment is still evolving.
How are Virtual Digital Assets taxed?
Income derived from VDAs is subject to a 30% tax rate, regardless of the individual's income slab. This flat rate applies to all profits generated from VDAs, including cryptocurrencies and NFTs. Importantly, only the cost of acquiring the VDA is deductible; expenses such as transaction fees or mining costs are not considered deductible expenses. Losses from any other source cannot be set off against income from Virtual Digital Assets.
In addition to the 30% income tax, a 1% Tax Deducted at Source (TDS) is applied to all VDA transactions exceeding ₹10,000 (for non-specified persons) and ₹50,000 (for specified persons) in a financial year. This TDS is deducted at the point of transaction (both purchases and sales) to enhance tracking of VDA activity.
A specified Person u/s194S is -
- An individual/HUF having total sales/gross receipts in a year, immediately preceding the year in which it is transferred, that do not exceed Rs. 1 crore (for businesses) or 50 lakhs (for profession).
- An individual not having any income under the head Income from Business & Profession.
When the consideration is in kind or in exchange for another VDA, or when it is partly in cash and partly in kind, but the cash cannot meet the TDS liability for the entire transfer. The person paying such consideration must make sure that the tax has been paid before releasing such consideration.
Payments made by a particular individual are exempt from the provisions under sections 203A and 206AB.
The section also states that once the tax has been deducted under section 194S, then no other TDS/TCS provision applies to the transaction. If tax is deductible both under section 194O and 194S, then TDS is deducted under section 194S.
Set off Losses from VDAs against other incomes
VDA taxation has a significant drawback, losses cannot be offset against any other income, including salary, business income, or profits from other investments. This restriction extends even to future VDA gains. For example, a loss on cryptocurrency this year won't reduce your tax liability on any future VDA profits. Essentially, the tax system treats VDA gains and losses as completely isolated from all other income.
What Sets Virtual Digital Assets Apart from Digital Currencies?
Only instruments issued by a central bank qualify as currency (e.g., the dollar, rupee). Therefore, cryptocurrencies are not considered currencies unless issued by a central bank.
The Reserve Bank of India (RBI) plans to introduce a central bank digital currency (CBDC), the "digital rupee," in the next fiscal year (starting April 1st). This will be a true digital currency.
In contrast, "virtual digital assets" are created outside the purview of central banks by individuals. These are commonly referred to as cryptocurrencies (e.g., Bitcoin), but this is a misnomer. These private virtual currencies are not backed by any issuer's debt or liabilities and, therefore, do not function as money or currency.
Virtual digital assets encompass both fungible and non-fungible tokens (NFTs). Fungible tokens, like cryptocurrencies, are interchangeable and can potentially serve as a medium of exchange. NFTs, on the other hand, are unique cryptographic assets on a blockchain, each with distinct identification codes and metadata. NFTs can represent various things, including identities and property rights.
How to Report VDAs in ITR?
In the budget 2022, the government introduced Schedule VDA in ITR-2 and ITR-3. The taxpayers are required to report all their virtual digital assets and their details under Schedule VDA while filing their ITR.
It's crucial to accurately report this income. The 1% Tax Deducted at Source (TDS) on VDA transactions provides the government with a record of these dealings. Therefore, it's advisable to declare all VDA-related income upfront to avoid potential notices or penalties later.
ITR filing for FY 24-25 has begun, and this year, the Income Tax Department has become stricter and is issuing notices for those misreporting VDA income or skipping schedule VDA. Our experts can help you ensure an accurate calculation of income and taxes. Need help reporting your virtual digital assets in your ITR? Book Online CA Now!
Frequently Asked Questions
Q- What if I don’t report income from Virtual Digital Assets?
Non-reporting of income from virtual digital assets (VDAs) can result in penalties, fines, and even legal consequences. The Income Tax Department is actively monitoring VDA transactions, particularly with the implementation of the TDS system. Therefore, it's essential to stay informed about the relevant regulations, as ignorance will not be considered a valid defense.
Q- What Are the Tax Rules Under Section 115BBH?
Section 115BBH of the Income Tax Act is the key legislation governing VDA taxation. It mandates a 30% tax rate on profits from VDAs and disallows offsetting VDA losses against other income sources. Furthermore, it restricts deductions to only the cost of acquisition, as previously explained.
Q- Does transferring virtual digital assets trigger a tax liability?
Yes, each transfer of a virtual digital asset is considered a taxable event. Whether you convert it into fiat currency (such as INR) or trade it for another cryptocurrency, the transaction qualifies as a "transfer" under tax regulations. Any gains from such transfers are taxed at a flat rate of 30%.
