Taxation of virtual digital assets (VDAs) is a relatively new area, particularly given the global growth in popularity of cryptocurrencies, NFTs (non-fungible tokens), and other digital assets. In India, the taxation of VDAs is governed by the provisions introduced in the Finance Act, 2022, and further guidelines issued by the Income Tax Department.
Key Taxation Rules for Virtual Digital Assets
“Discover the top 3 key taxation rules for virtual digital assets in India, including income tax rates, TDS provisions, and gift taxation with practical examples to stay compliant.”
- Definition of VDA: Virtual Digital Assets are defined to include cryptocurrencies, tokens, NFTs, or any other digital representation of value. The government retains the authority to specify what constitutes a VDA.
- Tax Rate
- Income from the transfer of VDAs is taxed at a flat rate of 30% (excluding surcharge and cess).
- No deductions are allowed for expenses other than the cost of acquisition.
- Losses from the transfer of VDAs cannot be set off against other income, nor can they be carried forward to future years.
- Income from the transfer of VDAs is taxed at a flat rate of 30% (excluding surcharge and cess).
- TDS Provisions
- A Tax Deducted at Source (TDS) of 1% is applicable on transactions involving VDAs where the consideration exceeds ₹50,000 for specified individuals (or ₹10,000 in other cases) in a financial year.
- A Tax Deducted at Source (TDS) of 1% is applicable on transactions involving VDAs where the consideration exceeds ₹50,000 for specified individuals (or ₹10,000 in other cases) in a financial year.
- Gift Taxation
- VDAs received as gifts are taxed in the hands of the recipient, provided the aggregate value of gifts exceeds ₹50,000 in a financial year.
- VDAs received as gifts are taxed in the hands of the recipient, provided the aggregate value of gifts exceeds ₹50,000 in a financial year.
Also Read :- GST Section 128A Explain with Example
Example to Illustrate Taxation
Scenario 1: Sale of Cryptocurrency
- Details
- You purchase 1 Bitcoin for ₹20,00,000.
- Later, you sell it for ₹25,00,000.
- You purchase 1 Bitcoin for ₹20,00,000.
- Tax Computation
- Profit = ₹25,00,000 – ₹20,00,000 = ₹5,00,000.
- Tax = 30% of ₹5,00,000 = ₹1,50,000.
- Add surcharge and cess as applicable.
- Profit = ₹25,00,000 – ₹20,00,000 = ₹5,00,000.
You cannot deduct expenses like electricity or internet bills used for mining/trading.
Also Read : – NEW INCOME TAX RULES 2025 ON THE CASH TRANSACTIONS
Scenario 2: Loss on Sale of NFTs
- Details
- You buy an NFT for ₹3,00,000.
- You sell it for ₹2,00,000, incurring a loss of ₹1,00,000.
- You buy an NFT for ₹3,00,000.
- Tax Treatment
- Loss of ₹1,00,000 cannot be adjusted against any other income or carried forward.
- Effective taxable income from this transaction is ₹0.
- Loss of ₹1,00,000 cannot be adjusted against any other income or carried forward.
Scenario 3: Gifting VDAs
Gift Taxation Provisions (India)
- Applicability
- Gifts of VDAs are taxable under Section 56(2)(x) of the Income Tax Act.
- If the aggregate value of gifts (including VDAs) received during a financial year exceeds ₹50,000, the total value is added to the recipient’s taxable income.
- Gifts of VDAs are taxable under Section 56(2)(x) of the Income Tax Act.
- Exceptions (Not Taxable)
- Gifts received from specified relatives (e.g., parents, siblings, spouse, etc.).
- Gifts received on occasions like marriage (of the recipient).
- Gifts received from an employer as part of professional/employment income (taxed under a different head).
- Gifts received from specified relatives (e.g., parents, siblings, spouse, etc.).
- Valuation
- The value of the gift is determined based on its fair market value (FMV) at the time of receipt.
Details
- Person A gifts 1 Ethereum to Person B.
- FMV of 1 Ethereum on the gift date = ₹1,00,000.
- Person B has received no other gifts in the financial year.
- Relationship: Person A and Person B are friends (not covered in the exceptions).
Tax Computation for Person B (Recipient)
- Aggregate Value of Gifts
- Total value of gifts received during the year = ₹1,00,000 (exceeds ₹50,000 threshold).
- Total value of gifts received during the year = ₹1,00,000 (exceeds ₹50,000 threshold).
- Taxable Value
- The entire ₹1,00,000 (since it exceeds ₹50,000) is taxable under the head “Income from Other Sources.
- The entire ₹1,00,000 (since it exceeds ₹50,000) is taxable under the head “Income from Other Sources.
- Tax Liability
- The ₹1,00,000 is added to Person B’s total taxable income.
- Tax is computed based on Person B’s applicable income tax slab rate.
Example
- If Person B’s total income (including the gift) is ₹6,00,000, they fall under the 20% tax slab (as per current slab rates for FY 2024-25).
- Tax on the gift = 20% of ₹1,00,000 = ₹20,000 (plus applicable surcharge and cess).
If the Gift is Received from a Relative or on Marriage
- No tax is levied on the gift.
- However, Person B must maintain records to prove the exempt nature of the gift if questioned by the tax authorities.
Compliance for Person A (Donor)
- The donor is not taxed for giving the gift. However, if the VDA transfer is done through a platform, the 1% TDS rule may apply. This TDS is deducted based on the FMV of the VDA at the time of transfer.
Practical Implications
- Record-Keeping: Maintain proper records of all transactions, including dates, amounts, and the cost of acquisition.
- TDS Compliance: Platforms or individuals facilitating VDA transactions must comply with TDS requirements.
- Tax Planning: Be mindful of the 30% tax rate and the inability to offset losses.
