Understanding Virtual Digital Assets

• Digital representations of value that can be traded, transferred, or used for payment.
• Created through cryptographic or other digital means.
• Excludes the digital representation of fiat currency.

Types of Virtual Digital Assets

Crypto Assets

• Cryptographically secured digital currencies or tokens enabling decentralised transactions.

Stablecoins

• Cryptocurrencies whose values are linked to fiat currencies, commodities, or other assets to maintain price stability.

Non-Fungible Tokens (NFTs)

• Tokens that represent unique digital or physical assets, establishing verifiable ownership.

Decentralised Finance (DeFi) Assets

• Blockchain-based financial instruments that enable access to financial services without traditional intermediaries.

Security Tokens

• Digital assets that represent financial securities such as stocks, bonds, or tokenised real-world assets.

Central Bank Digital Currency (CBDC)

• Digital currency issued and backed by a central bank, equivalent in value to the nation’s fiat currency.

VDAs vs Digital Currency

• Digital currency must be issued by a central bank to qualify as legal tender.
• All other privately issued digital tokens or cryptocurrencies are classified as Virtual Digital Assets.

Legal Status of Virtual Digital Assets in India

• The Income Tax Bill, 2025 establishes a comprehensive legal definition and taxation structure for Virtual Digital Assets.
• VDAs are explicitly recognised as property under Section 92(5)(f), aligning with global practices where digital assets are treated either as securities or property.
• Under Section 76(1), VDAs are classified as capital assets, bringing them under standard capital gains taxation.

Taxation Provisions for VDAs

Capital Gains Tax

• Short-term and long-term gains from the sale, transfer, or exchange of VDAs are taxed as capital gains.
• A uniform 30 percent tax rate is imposed on all VDA transfer income.
• No deduction is allowed for expenditure or allowances other than the cost of acquisition.
• Costs such as mining expenses, platform fees, or transaction charges cannot be deducted.

Tax Deducted at Source

• Section 393 mandates 1 percent TDS on all VDA transfers, including peer-to-peer transactions.
• Exemption thresholds:
  • ₹50,000 for small traders
  • ₹10,000 for others

Undisclosed Income and Seizure

• Section 301 includes VDAs under regulations for undisclosed income.
• Section 524(1) allows tax authorities to seize VDAs during investigations or raids, similar to physical assets.

Mandatory Reporting

• Section 509 requires exchanges, wallet providers, and individuals dealing in VDAs to report transactions in a prescribed format.
• VDA activity is included in the Annual Information Statement (AIS) for automated compliance tracking.

Significance of the Legal Framework

• Prevents VDAs from operating in a regulatory grey zone.
• Enhances the government’s ability to tax, regulate, trace, and seize digital assets when necessary.
• Supports financial transparency and deters the use of crypto assets for illicit activities.
• Aligns India with global standards in digital asset governance.

Challenges Associated with VDAs in India

• Absence of a comprehensive regulatory framework covering investor protection, market conduct, and technological risks.
• Harsh tax treatment may discourage innovation and long-term investment in digital assets.
• Need for clear guidelines on market regulation, enforcement mechanisms, and consumer safeguards.
• Risk of capital flight to jurisdictions offering more favourable tax and regulatory environments.