Cryptocurrency, NFT, and VDA Income Tax (Virtual Digital Asset)

Nirmala Sitharaman, the Finance Minister, introduced a new Section 115BBH in Budget 2022 for a 30% flat tax on cryptocurrency and other VDA (Virtual Digital Assets). Section 115BBH contains provisions for taxing income from VDA transfers, gifting, claiming expenses, and loss treatment. This section would take effect on April 1, 2022. In addition, the finance minister introduced a new Section 194S for the deduction of TDS on the transfer of virtual digital assets, which adds to the crypto news.

Income Tax on Cryptocurrency and VDA under Section 115 BBH of the Income Tax Act Section 115BBH of the Income Tax Act would go into effect on April 1, 2022, and would tax income from virtual digital assets. The crypto tax provisions are as follows. 

What precisely is a Virtual Digital Asset (VDA)?

A Virtual Digital Asset (VDA) is defined in Section 2(47)(A) of the Income Tax Act as cryptocurrency, Non-Fungible Tokens (NFTs), and any other digital asset notified by the central government in the official gazette.

Income Tax Act Section 115 BBH

If a taxpayer receives income from a VDA transfer, they must pay income tax at a flat rate of 30%.

Deductions for VDA transfers

• The taxpayer is not permitted to deduct any expenses or allowances from such income.
• The taxpayer can deduct the cost of acquisition, i.e. the purchase price, from his or her income.
• Thus, taxable income equals the difference between the selling and purchasing prices.
• The taxpayer cannot deduct the loss from the transfer of VDA from any other income. Furthermore, he or she cannot carry the loss forward to future years.

Crypto Investment Gift

A gift of cryptocurrency, NFT, or other VDA is taxable in the recipient’s hands according to Crypto tax India

Income Category for Crypto Tax

The announcement of Budget 2022 did not provide much clarity regarding the correct income head to classify the income from the transfer of VDA.

Transfer of Cryptocurrency as Capital Gains Income

For the following reasons, income from the transfer of a Virtual Digital Asset (VDA) should be classified as Capital Gains:

• The definition of Capital Asset includes ‘any other capital asset,’ according to Section 2(14) of the Income Tax Act. Other capital assets include cryptocurrency and other VDAs.
• According to Section 115BBH, the term “transfer of asset” usually refers to capital assets.
• Section 115BBH’s term ‘cost of acquisition’ is commonly used to calculate income from capital gains. 

Transfer of Crypto as Additional Income (IFOS)

For the following reasons, income from the transfer of a Virtual Digital Asset (VDA) should be classified under IFOS:

• Section 115 BBH corresponds to Section 115BB for tax on winnings from lotteries, betting, and gambling, which are taxed under the heading IFOS.
• According to Section 2(14) of the Income Tax Act, the definition of Capital Asset excludes cryptocurrency and other VDAs.

The Income Tax Department, on the other hand, has begun sending tax notices to taxpayers who traded in cryptocurrency in previous years but did not report such income on their ITR.  Although it is unclear which income head the taxpayer should report such income under, the notice appears to consider it under the heading Capital Gains. The Income Tax Department must issue a circular to clarify this.

Although it is unclear which income head the taxpayer should report such income under, the notice appears to consider it under the heading Capital Gains of crypto tax. The Income Tax Department must issue a circular to clarify this.

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