Taxing Virtual Digital Assets

Syllabus :GS3/Economy/Science & Technology 

In News

• India’s Income Tax Bill, 2025 introduces a legal framework for Virtual Digital Assets (VDAs), aligning the country’s tax structure with global standards.
  • Major economies like the U.K., U.S., Singapore, and Australia treat VDAs as property or securities.

Virtual Digital Assets (VDAs) 

• VDAs were defined in the Finance Act, 2022 with the introduction of clause 47A to Section 2 of the Income Tax Act, 1961.
• The Supreme Court, in the Internet and Mobile Association of India v. RBI case, referred to the FATF Report’s definition of virtual currency (VC), describing it as a digital unit that acts as a medium of exchange, unit of account, and store of value, but is not government-issued legal tender. 
• The Court also interpreted VDAs as property, commodity, or payment method, and concluded they can be treated as intangible property or goods.

Introduction of VDA Taxation in India

• India’s Income Tax Bill, 2025 classifies VDAs (including crypto assets, NFTs, etc.) as property and capital assets.
• This aligns India with global practices like the U.K., Australia, and New Zealand, where VDAs are treated as property for tax purposes.
• VDAs will be taxed under capital gains provisions.
  • Profit from the sale of VDAs will be taxed based on short-term or long-term capital gains rules, depending on the holding period.

Features 

• A flat 30% tax rate is applied on VDA income from transfers, with no deductions for transaction costs, unlike some countries like the UAE.
• A 1% TDS (Tax Deducted at Source) is imposed on VDA transfers, even for peer-to-peer (P2P) transactions.
• TDS exemption thresholds are ₹50,000 for small traders and ₹10,000 for others.
• Tax authorities can seize VDAs during investigations or tax raids, similar to assets like cash or gold.
• Entities dealing in VDAs (such as exchanges and wallet providers) are required to report transactions in a prescribed format.
• VDAs must be included in the Annual Information Statement (AIS), ensuring automatic recording in taxpayers’ financial profiles.

Importance 

• The requirement for reporting VDA transactions increases transparency and helps prevent tax evasion, as authorities can track large crypto transactions through mechanisms like Tax Deducted at Source (TDS).
• The taxation of VDAs as property may alter investment behavior by introducing more financial discipline, encouraging investors to carefully consider tax implications before trading.
• It will foster foreign investment and confidence and it enhances the credibility of India’s digital asset market on the global stage.

Challenges 

• Despite advancements in taxonomy and taxation, there are gaps in investor protection, market regulation, and enforcement mechanisms.
• A 30% tax rate can lead to a higher tax burden on individuals trading VDAs compared to traditional investments, especially for frequent traders.

Suggestions 

• India’s move to treat VDAs as property and capital assets aligns with international standards like the U.K. and the U.S., enhancing the legal recognition and regulatory framework for digital assets.
• But a comprehensive policy framework integrating financial regulations, consumer rights, and technology is necessary for a secure digital asset ecosystem.

Source: TH