Taxation of Virtual Digital Assets in India

 

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Taxation of  Virtual Digital Assets in India

Section 115BBH of Income Tax Act, 1961

The financial year 2022-23 is the first year in which Indian VDA users will be taxed for their VDA trades. In simple words, any Indian resident who transacts VDA, whether as a trader, miner, or yield farmer, is required to declare their assets and pay taxes on the gains as per Section 115BBH of the Income Tax Act, 1961.

Further, Gain from the Transfer of VDA is taxed at a flat rate of 30% (plus applicable surcharge and 4% cess). This rate is the same as India’s highest income tax bracket (excluding surcharge and cess). Private investors, commercial traders, and anyone else who transfers VDA in a given financial year are subject to this tax (subject to conditions). Furthermore, the 30% tax rate will apply regardless of the nature of the income. So it makes no difference whether it is investment income or business income, and there is no distinction between short-term and long-term gains.

Here, the points to be remembered are:

• There is no expense deduction allowed. (i.e. such as platform fees, broker fees and internet charges and etc.)
• Only the acquisition cost can be deducted.
• Losses in one VDA transaction cannot be set off with gains in another VDA transaction. (i.e. Transactions should be separated in terms of Profit and Loss for the purpose of the Income Tax.)
• There is no set-off for loss from any other source of income (business income or salary income or house property income etc.)
• There is no carry forward of VDA losses to future years to set off against VDA income.
• No indexation of Cost of Acquisition.
• No Exemption under Section 54F.
• No deduction under Section 80C allowed. However, relief under Section 87A i.e. rebate can be allowed.

Let’s take an example. If an investment of INR 2,00,000 was made in VDA at the beginning of FY 2022, and by the end of FY 2022, the VDA was sold for INR 2,50,000, a flat 30% VDA tax is applicable on the gain (INR 50,000). As an investor, you will be liable to pay INR 15,000 (plus surcharge and cess) as the tax on VDA income in that financial year.

It should be noted that any income derived from VDA transactions is taxed only at the time of transfer; if a person continues to hold the asset, the unrealized gains are not taxable. Overall, the Government has neither legalized nor prohibited the use of VDA. However, it has taken steps to discourage short-term trading.