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New Legal Framework for Virtual Digital Assets
Context:
As digital economies expand and blockchain technology transforms global finance, governments worldwide are working to classify, regulate, and tax Virtual Digital Assets (VDAs).
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- India’s Income Tax Bill, 2025, introduces a comprehensive legal framework for VDAs, as defined under Section 2(111), aligning the country’s tax structure with international standards.
- This development is significant, considering how major economies like the U.K., the U.S., Singapore, Australia, New Zealand, and the UAE have classified VDAs—primarily as property or securities.
VDAs as Property and Capital Assets
- For the first time, the Income Tax Bill, 2025 explicitly categorises VDAs as property (Section 92 (5)(f)) and capital assets (Section 76(1)).
- This classification has major implications for taxation, compliance, and legal recognition.
- VDAs, including cryptocurrencies, Non-Fungible Tokens (NFTs), and similar digital assets, are now considered property, aligning India’s approach with global practices.
- Countries such as the U.K., Australia, and New Zealand classify digital assets as property, while the U.S. treats many as securities.
- The classification of VDAs as capital assets means that any gains from their sale, transfer, or exchange will be taxed under capital gains provisions, similar to real estate, stocks, and bonds.
- For example, if an individual purchases Bitcoin for ₹10 lakh and sells it for ₹20 lakh, the ₹10 lakh profit will be subject to capital gains tax—either short-term or long-term, depending on the holding period.
- This policy ensures that VDAs are subject to standard asset taxation principles, reducing the risk of their misuse as unregulated financial instruments.
- The U.K.’s HM Revenue & Customs (HMRC) follows a similar model, recognising crypto assets as property and subjecting them to Capital Gains Tax (CGT).
- Likewise, New Zealand’s Inland Revenue Department treats crypto assets as property, making them taxable under income tax laws.
- Continuing the precedent set in 2022, the bill imposes a 30% tax on income from VDA transfers.
- Unlike traditional capital assets, no deductions (other than the cost of acquisition) are permitted.
- This means that expenses related to mining, transaction fees, platform commissions, and gas fees cannot be deducted when calculating taxable income.
- For instance, if an investor buys Ethereum for ₹5 lakh and sells it for ₹7 lakh, the ₹2 lakh profit is taxed at a flat 30%, with no relief for transaction costs.
- This tax treatment is stricter than in the UAE, where the Virtual Assets Regulatory Authority (VARA) permits regulated trading of VDAs with 0% personal income tax on gains in certain cases.
- Similar to previous regulations, Section 393 imposes a 1% Tax Deducted at Source (TDS) on VDA transfers.
- This applies even to peer-to-peer (P2P) transactions, ensuring that the government tracks large crypto transactions. The exemption threshold for TDS is ₹50,000 for small traders and ₹10,000 for others.
Reporting Requirements and Compliance Measures
- A crucial aspect of the bill is the inclusion of VDAs in undisclosed income taxation and asset seizure regulations.
- Section 301 mandates that individuals who fail to report their VDA holdings in tax filings will have their holdings classified as undisclosed income and taxed accordingly.
- Additionally, Section 524(1) empowers tax authorities to seize VDAs during investigations or tax raids, similar to the treatment of cash, gold, or real estate in cases of tax evasion.
- This aligns with global enforcement trends, such as the U.K. High Court’s ruling that crypto assets can be considered property, allowing courts to freeze or seize them in legal disputes.
- Under Section 509, any entity dealing in crypto assets—including exchanges, wallet providers, and individual traders—is required to report transactions in a prescribed format.
- This provision ensures compliance from platforms facilitating crypto trades, making it more difficult to launder money through digital assets.
- Additionally, the bill mandates that VDAs be included in Annual Information Statements (AIS), ensuring that all crypto transactions are automatically recorded in taxpayers’ financial profiles.
Aligning with Global Standards
- India’s decision to classify VDAs as property and capital assets represents a significant step toward aligning with international legal standards.
- The U.S. Securities and Exchange Commission (SEC) classifies many crypto assets as securities, bringing them under financial market regulations.
- By defining VDAs as property, India gains the ability to tax, regulate, and seize crypto assets when necessary, preventing their misuse for illicit financial activities.
However, despite progress in defining the taxonomy and taxation of VDAs, a comprehensive regulatory framework remains absent.
