In India, cryptocurrencies and NFTs have been defined as Virtual Digital Assets. Until the budget of 2022, the taxability of these assets was uncertain. However, after the budget and subsequent clarifications and FAQs issued by the Income Tax department, the taxation of Virtual Digital Assets has become more clear. Virtual Digital Assets refer to any code or token generated through cryptographic means that functions as a store of value. Non-Fungible Tokens are also included in this definition, but gift cards or vouchers are not. Gains from the sale of Virtual Digital Assets can be categorized as income from Capital Gains or Income from Business and Profession. The tax treatment, however, remains the same under both heads of income. Schedule VDA has been placed under the head Capital Gains, while Income from Business and Profession includes adjustments of income and expenses of cryptocurrencies in schedule BP.
When computing gains from Virtual Digital Asset (VDA) transactions, only the cost of acquisition needs to be deducted from the selling price. Selling expenses, mining expenses, and infrastructure expenses for mining cannot be deducted. Each VDA is considered an asset class of its own, so losses from a particular VDA cannot be used to set off gains from another VDA. The tax rate for gains from VDA transactions is 30%, which is subject to increase by the Health and Education Cess and surcharge if applicable. The benefit of the basic exemption limit does not apply to this special tax rate. For example, if an individual has income from salary of Rs. 2,00,000, interest income of Rs. 5,000, and income from transfer of VDA of Rs. 40,000, they will be taxed at the special rate of 30% on the VDA income.
In this scenario, the total income (excluding income from VDA) is below the maximum amount of income not chargeable to tax, which is less than Rs. 2,50,000. Therefore, there is no tax on income other than income from VDA. The tax on income from VDA is Rs. 12,000, which is calculated by applying the tax rate of 30% plus additional surcharge and cess. If an individual receives a gift in the form of VDA, it may fall under the ambit of gift tax under section 56 of the Income Tax Act. If VDA is received as a gift and the aggregate fair market value of such VDA exceeds Rs. 50,000, the entire aggregate fair market value of VDA will be chargeable to tax. Similarly, if any property is received for a price that is less than the aggregate fair market value of the VDA by an amount exceeding Rs. 50,000, the difference between fair market value and price paid is chargeable to tax. The limit of Rs. 50,000 will be checked for every transaction and not in the aggregate of all transactions.
It is important to note that the section governing the taxability of VDAs, Section 115 BBH, does not differentiate between tax residents and tax non-residents. Therefore, the taxability of VDAs will be the same for both categories. However, if an NRI transfers VDAs in exchanges located outside India from the VDA wallet located outside India and the proceeds come in bank accounts located outside India, then such gains will not be taxable in India in the hands of the NRIs.
