Wednesday, 21 December 2022 / Published in Income Tax

Crypto or Digital Assets Accounting and Taxation

Effective from 01^st April 2022, government has levied tax on income from virtual digital assets. Let us understand what is VDA and how it is taxed and related accounting issues.

The Finance Act 2022 has brought into picture taxation of VDA by introducing
Section 2(47(A) by defining what is VDA and section by defining method of computation of income/loss on VDA. The very purpose of introducing taxation on VDA by remove the veil of secrecy on such uncontrolled virtual currencies since it was more advantageous for Antisocial and Antinational elements to transact in VDA and remain in dark.

Along with that RBI was also showing red flags against private VDA due to its implication on national security and economic stability in the country can be very serious.

To address the above issues and other reasons the Finance Minister introduced taxation on VDA effective from 01^st April 2022 along with provisions of withholding tax from 01^st July 2022 and making India the first country to take such statutory measures to discourage or control transactions in VDA.

Definition of Virtual Digital Assets?:

The definition of Virtual Digital Assets is inserted by the Finance Act 2022 , w.e.f. 1-4-2022, vide new clause (47A) of the section 2 of the Income-tax Act 1961, where Virtual Digital Assets means:

(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;

(b) a non-fungible token or any other token of similar nature, by whatever name called;

Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.

As per Notification No. 74/2022, dated. 30-06-2022, the Central Government hereby notifies following virtual digital assets which shall be excluded from the definition of virtual digital asset:

Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services;
Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services;
Subscription to websites or platforms or application.

Explanation.—For the purposes of this clause,—

(a) “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify; As per Notification No. 75/2022, dated. 30-06-2022 , the Central Government hereby specifies a token which qualifies to be a virtual digital asset as non-fungible token within the meaning of sub-clause (a) of clause (47A) of section 2 of the Act but shall not include a nonfungible token whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable

So what does Virtual Digital Asset (VDA) excludes

From the above definition of VDA under section 2(47)(A) of the Income Tax Act, below are excluded from definition of VDA:

(a) Indian Currency

(b) Foreign Currency

(c) Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.

Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services;
Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services;
Subscription to websites or platforms or application.

(d) As per Notification No. 75/2022, dated. 30-06-2022 , it shall not include a nonfungible token whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable.

Section 115BBH Tax on income from virtual digital assets.

115BBH. (1) Where the total income of an assessee includes any income from the transfer of any virtual digital asset, notwithstanding anything contained in any other provision of this Act, the income-tax payable shall be the aggregate of—

(a) the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of thirty per cent; and

(b) the amount of income-tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause (a).

(2) Notwithstanding anything contained in any other provision of this Act,—

(a) no deduction in respect of any expenditure (other than cost of acquisition, if any) or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the income referred to in clause (a) of sub-section (1); and

(b) no set off of loss from transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.

(3) For the purposes of this section, the word “transfer” as defined in clause (47) of section 2, shall apply to any virtual digital asset, whether capital asset or not.

From the provisions of Section 115BBH, reproduced above, the emerging aspects are:

The section has prescribed separate system for taxation of income from transfer of virtual digital asset.
Income from transfer of virtual digital asset shall be ascertained separately for the purpose of imposing tax thereon.
Income from transfer of virtual digital asset shall be subjected to income tax at the rate of 30 per cent.
Tax on transfer of virtual digital asset shall be charged irrespective of :

(a) income is below threshold limit or

(b) the assessee has sustained loss

Loss from transfer of virtual digital asset is not eligible for setoff against any income including, income from transfer of any other virtual digital asset.

Example: Suppose a taxpayer earns a gain say INR 100000 on Bitcoin (VDA-1) and incurs a loss of INR 50000 on Ethereum(VDA-2) during the same year, the loss of INR 50000 will be ignored, and the taxpayer will be liable to pay tax on INR 100000. Not only this, the loss of VDA-2 Rs. 50000/- will not be permitted to be carried forward and set off in next assessment year. Even if an individual has zero normal taxable income, he will have to pay the at 30 percent on VDA- income without any deduction except the cost of acquiring the VDA. Other deductions allowed under Sec 80C, 80D, and the likes are also not permitted from VDA-income.

Head of Income:

The Government did not clarify regarding head of income under which virtual digital assets will be taxable.

Taxation under the head Business Income: If the transactions in virtual digital assets is frequent and voluminous, it may held that taxpayer is trading in such assets. In this case income from sale or transfer of virtual digital assets is taxable as business income. The income (net of cost of acquisition) will be taxable at the rate of 30% plus surcharge and cess. Example: Mr. A has purchased 1,000 NFTs at Rs. 1,400 each on 16 July 2020. He transferred all NFTs at Rs 1,700 in the previous year 2022-23.

The income under head business will be Rs 3,00,000 which will be taxable at rate of 30%. Under the head business income , surcharge can be levied upto 37%. Where virtual digital assets is held as stock in trade, any income from sale/transfer shall be included under head Income from Business & Profession.

Taxation under the head Capital Gain:

The Government did not clarify if the virtual digital assets is currency, commodity or security. Virtual digital assets may be classified as income under head capital gain if purchased by assessee for investments purpose. If gain arising from sale of virtual digital assets , then further classification relating to long-term or short-term gain would depend on period of holding of assets. If virtual digital assets is hold by assessee for more than 36 months from date of purchase, it will be treated as long term capital gain, otherwise as short term capital gain. The tax shall be applicable at 30% plus surcharge and cess at Full value of consideration less cost of acquisition.

Example: Mr. A has purchased 1,000 NFTs at Rs. 1,400 each on 16 July 2020. He transferred all NFTs at Rs 1,700 in the previous year 2022-23 The income under head capital gain will be Rs 3,00,000 which will be taxable at rate of 30% irrespective of whether it is long term or short term capital gain. If it is the long term capital gain, surcharge will be restricted to 15% but in case of short term capital gain, surcharge can be levied upto 37%.

Taxation under head Income from other Sources:

In case of stray transactions in virtual digital assets, the residuary head of income ‘Income from Other Sources’ found reporting of income from transaction in VDA which will be taxable at rate of 30% (net cost of acquisition) plus surcharge and cess. Example: Mr. A has purchased 1,000 NFTs at Rs. 1,400 each on 16 July 2020. He transferred all NFTs at Rs 1,700 in the previous year 2022-23 The income under head income from other sources will be Rs 3,00,000 which will be taxable at rate of 30%. Surcharge on income from other sources can be levied upto 37%.

In order to attract VDA-tax the following conditions must exists i.e. condition of disposal. The following transactions are treated as Disposals of VDAs and attract VDA-tax.

Selling crypto for INR or another fiat currency.
Trading crypto for Another Crypto, including Stablecoins.
Spending crypto on Goods and Services.
Gifting crypto Income occurs only when the gifted crypto are sold

The following transactions in VDA are Tax-exempt:

Buying Crypto with fiat currency (say INR)
Holding Crypto- No Wealth tax
Moving crypto between wallets
Gifting Crypto to specified relatives
Gifting Crypto of value less than Rs. 50000/-
Donating Crypto to Charity (Deduction u/s 80G ?)

Applicability of Advance Tax provisions on income arising on VDA

Assessee earning income from sale of VDA is required to pay advance tax as per applicable advance tax provisions under Income-tax law. In such cases interest under section 234C may not be applicable.

TDS on Payment on Transfer of Virtual Digital Assets- Section 194S

In order to widen the tax base from the transactions so carried out in relation to these assets, Finance Act 2022, w.e.f. 1-7-2022 inserted vide section 194S to the Act to provide for deduction of tax on payment on transfer of virtual digital asset to a resident at the rate of one per cent of such sum. However, no deduction will be required wherein the consideration paid during the Financial Year does not exceed Rs. 50,000/- (in case of specified person) or Rs. 10,000/- (in any other case).

Where the consideration is wholly in kind or in exchange of another virtual digital asset where there is no part in cash; or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such transfer, the person paying such consideration shall make sure that the tax has been paid before releasing such consideration.

The provisions of Section 203A (Tax deduction and collection number) and 206AB (Higher TDS rates for non-filers of ITR) will not be applicable to payments made by specified person. Thus, even if the deductee has not furnished the return of income for a specified period, the tax shall be deducted at the rate prescribed under this provision and not as specified in Section 206AB, if the payer is a specified person.

The section also provides that if tax has been deducted under section 194S, then no other TDS/TCS provision shall apply in respect of the said transaction. Where tax is deductible under both section 194-O and proposed section 194S, then tax shall be deducted under section 194S and not under section 194-O. If the deductee does not furnish his PAN to the deductor, the tax shall be deducted at the rate of 20% as prescribed under Section 206AA.

If the virtual digital asset is transferred to non resident citizens of india, tax on payment on transfer of virtual digital asset will be covered under section 195 of Income-tax Act. Any kind of income is chargeable under section 195 of Income-tax Act.

Below Guidelines are issued by CBDT under section 194S(6)- Circular No. 13 of 2022

Question 1. Who is required to deduct tax when the transfer of VDA is taking place on or through an Exchange and payment is made by the purchaser to the Exchange (directly or through broker) and then from the Exchange it goes to seller directly or through the broker?

Answer: In a peer to peer (i.e. direct buyer to seller) transaction, the buyer (i.e person paying the consideration) is required to deduct tax under section 194S of the Act. However, if the transaction is taking place on or through an Exchange there is a possibility of tax deduction requirement under section 194S of the Act at multiple stages. Hence, in order to remove difficulties for transactions taking place on or through an Exchange, the following clarifications are issued:

Tax may be deducted under section 194S of the Act only by the Exchange which is crediting or making payment to the seller (owner of the VDA being transferred). In a case where broker owns the VDA, it is the broker who is the seller. Hence, the amount of consideration being credited or paid to the broker by the Exchange is also subject to tax deduction under section 194S of the Act.
In a case where the credit/payment between Exchange and the seller is through a broker (and the broker is not seller), the responsibility to deduct tax under section 194S of the Act shall be on both the Exchange and the broker. However, if there is a written agreement between the Exchange and the broker that broker shall be deducting tax on such credit/payment, then broker alone may deduct the tax under section 194S of the Act. The Exchange would be required to furnish a quarterly statement (in Form no 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962.
In a case where the transfer of VDA takes place on or through an Exchange and the VDA being transferred is owned by such Exchange: In this case there are no multiple players. The buyer is required to deduct tax under section 194S of the Act.

However, there may be a practical issue as the buyer may not know whether the VDA being transferred is owned by the Exchange or not. Hence, there may be genuine doubt in the mind of buyer with regard to its responsibility to deduct tax under section 194S of the Act. This difficulty would also be there if the buyer is buying VDA from an Exchange through a broker.

To remove this difficulty, it is clarified that while the primary responsibility to deduct tax under section 194S of the Act, in this case, remains with the buyer or his broker, as an alternative the Exchange may enter into a written agreement with the buyer or his broker that in regard to all such transactions the Exchange would be paying the tax on or before the due date for that quarter. The Exchange would be required to furnish a quarterly statement (in Form No. 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962. The Exchange would also be required to furnish its income tax return and all these transactions must be included in such return. If these conditions are complied with, the buyer or his broker would not be held as assessee in default under section 201 of the Act for these transactions.

Question 2: How will this operate in a situation where it is in kind or in exchange of another VDA?

the buyer will release the consideration in kind after seller provides proof of payment of such tax (e.g. Challan details etc.). In a situation where VDA “A” is being exchanged with another VDA “B”, both the persons are buyer as well as seller. One is buyer for “A” and seller for “B” and another is buyer for “B” and seller for “A”. Thus both need to pay tax with respect to transfer of VDA and show the evidence to other so that VDAs can then be exchanged. This would then be required to be reported in TDS statement along with challan number. This year Form No. 26Q has included provisions for reporting such transactions. For specified persons, Form No. 26QE has been introduced.

However, if the transaction is through an Exchange then tax may be deducted by the Exchange. Such an alternative mechanism can be exercised by the Exchange based on written contractual agreement with the buyers/sellers.

When the Exchange opts for deduction of tax under section 194S of the Act on such transactions, there is also a possibility that the tax amount deducted is also in kind and needs to be converted into cash before it can be deposited with the Government. In this regard, the following mechanism shall be adopted by the Exchange

At the time of transaction, the Exchange will deduct TDS in the pair being traded. For example, in case of trade for Monero to Deso, 1% of Monero and 1% Deso will be deducted as tax under section 194S of the Act by the Exchange and balance shall be transferred to the customer. The trail of transactions evidencing deduction of 1% of consideration for every VDA to VDA trade shall be maintained by the Exchange.
The Exchanges shall immediately execute a market order for converting this tax deducted in kind (1% Monero/ 1% Deso in the above example) to one of the primary VDAs (BT, ETH, USDT, USDC) which can be easily converted into INR. This step will ensure that the tax deducted under section 194S of the Act in the form of non-primary VDAs like Deso/Monero is converted to an equivalent of primary VDAs which have a ready INR market. Time stamps of timing of orders to be maintained to ensure such conversion of VDAs withheld to be done on immediate basis by the Exchange. If the taxes are withheld in primary VDAs, this step would be ignored

Question 3: Whether the consideration for transfer of VDA shall be on Gross basis after including GST/commission or it shall be on “net basis” after exclusion of these items.

Answer: In order to remove difficulty, it is clarified that the tax required to be withheld under section 194S of the Act shall be on the “net” consideration after excluding GST/charges levied by the deductor for rendering service.

Question 4: In transactions where payment is being carried out through payment gateways, there may be tax deduction twice. To illustrate that a person ‘XYZ’ is required to make payment to the seller for transfer of VDA. He makes payment of one lakh rupees through digital platform of “ABC”. On these facts liability to deduct tax under section 194S of the Act may fall on both “XYZ” and “ABC. Is tax required to be deducted by both?

Answer: In order to remove this difficulty, it is provided that in the above example, the payment gateway will not be required to deduct tax under section 194S of the Act on a transaction, if the tax has been deducted by the person (‘XYZ’) required to make deduction under section 194S of the Act.

Question 5: How the limit of Rs.50000 (in case of specified persons) and Rs.10000 (in other cases) is to be computed?

Answer :

Since the threshold of fifty thousand rupees (or ten thousand rupees) is with respect to the financial year, calculation of consideration for transfer of VDA triggering deduction under section 194S of the Act shall be counted from 1st April, 2022. Hence, if the value or aggregate value of the consideration for transfer of VDA payable by a person exceeds fifty thousand rupees (or ten thousand rupees) during the financial year 2022-23 (including the period up to 30th June 2022), the provision of section 194S of the Act shall apply on any sum, representing consideration for transfer of VDA, credited or paid on or after 1st July 2022.

(ii) Since the provision of section 194S of the Act applies at the time of credit or payment (whichever is earlier) of any sum, representing consideration for transfer of VDA, such sum which has been credited or paid before 1st July 2022 would not be subjected to tax deduction under section 194S of the Act

Practical Examples related to VDA

Particulars of Income of individual –

Income from salary Rs. 1,80,000

Interest income Rs. 20,000

Income from transfer of VDA Rs. 45,000

Compute Tax

Solution: Total income (excluding Income from VDA) is below Maximum amount of income not chargeable to tax. Therefore tax on income other than income from VDA is Nil. Tax on Income from VDA is Rs. 14,040 (VDA will taxed at rate of 30% plus surcharge and cess).

As per section 194S of Income-tax act, 1961 provides for deduction of tax on payment on transfer of virtual digital asset to a resident at the rate of one per cent of such sum. However, no deduction will be required wherein the consideration paid during the Financial Year does not exceed Rs. 50,000/- (in case of specified person) or Rs. 10,000/- (in any other case)

Particulars of Income of individual –

Income from salary Rs. 1,80,000

Interest income Rs. 20,000

Income from transfer of VDA Rs. 1,50,000

Compute Tax

Solution: Total income (excluding Income from VDA) is below Maximum amount of not income chargeable to tax. Therefore, tax on income other than income from VDA is Nil. Tax on Income from VDA is Rs. 46,800 (VDA will taxed at rate of 30% plus surcharge and cess).

Particulars of Income of individual –

Income from Business: Loss of Rs 10,00,000

Interest Income: Rs 50,000

Income from Transfer of VDA: Rs 2,50,000

Compute

Tax Solution: As per Section 71 of the Act, loss from business income (other than speculative business) can be set off against income from other sources. Therefore, total income excluding income from VDA is loss of Rs. 9,50,000 which will be carried forward to next assessment year. Tax on Income from VDA is Rs. 78,000 (VDA will taxed at rate of 30% plus surcharge and cess @ 4%).

As per Section 115BBH of the Act, Loss arising from Transfer of VDA cannot be set off against income computed under any provisions of this Act. However, current Income-tax provisions is silent about whether loss other than from Transfer of Virtual Digital Assets can be set off against VDA Income. Income-tax provisions do not provide any clarification on this matter. Therefore, net loss of Rs. 9,50,000 is not set off with Income from VDA of Rs 2,50,000.

Whether rebate under section 87A of the Act is available

Particulars of Income of individual –

Income from Salary Rs. 3,00,000

Interest income Rs. 50,000

Income from transfer of VDA Rs. 1,00,000

Solution: As per Section 87A of the Act if a resident individual’s taxable income is upto Rs. 5 lakhs then they will get the benefit/tax rebate of Rs. 12,500 or the amount of tax whichever is lower. The provisions relating to VDA is not clear whether the rebate under Section 87A can be claimed. This is the matter of clarification and should be considered thereof.

If rebate under Section 87A might be claimed on income from VDA then Tax as per the above example would be Nil as Total Income including income from VDA is Rs 4,50,0000 i.e. within the threshold limit prescribed for claiming rebate under Section 87A.

Income from Salary Rs. 3,00,000

Interest income Rs. 50,000

Income from transfer of VDA Rs. 2,00,000

If rebate under Section 87A might be claimed on income from VDA then, Total income would be Rs. 5,50,000, therefore benefit of Section 87A would not be applicable as Total income exceeds Rs. 5,00,000. So Total tax on above income would be Rs. 67,600 (Tax on normal income upto Rs 2,50,000 is exempted. Tax over and above Rs. 2,50,000 is Rs. 5,000 as per slab rate for individual below 60 years and income from VDA is chargeable flat at 30% rate i.e. Rs. 60,000, plus surcharge and cess @ 4%).

If rebate under Section 87A not available on Income from VDA, then as per above example ,Total income for claiming Section 87A is Rs. 3,50,000, so no tax will be levied on total income other than income from VDA as it is below Rs. 5,00,000. Tax from VDA will be Rs. 62,400 (VDA will taxed at rate of 30% plus surcharge and cess @ 4%).

In the following circumstances, whether Section 44AD is applicable and income can be returned under estimated income scheme?

Income from business is Rs. 1,90,00,000 Income from transfer of VDA Rs.11,00,000 Section 44AD deals with Presumptive Taxation scheme for an eligible assessee engaged in eligible business. Income will be computed at rate of 6%/8% of the turnover or gross receipts.

Eligible assesse and eligible business is defined under the Section 44AD of the Act. We are considering the possibility of holding VDA as capital asset, As far as taxation is concerned , Income from transfer of VDA is chargeable flat at rate of 30% as per Section 115BBH, therefore section 44AD will not be applicable over it. Therefore, here Section 44AD will be applicable on Income of business of Rs 1,90,00,000 and Section 115BBH will be applicable on Income from VDA of Rs. 11,00,000

In the following circumstances, whether tax audit is applicable?

Income from business is Rs. 90,00,000

Income from transfer of VDA Rs. 11,00,000

As per Section 44AB of the Act, Every person carrying on business , if his sales or Gross receipts exceeds 1 crore/50 lakhs, get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant. Here, we are considering possibility of holding VDA as business assets, then in that case, sale proceeds from VDA should ideally be included for purpose of carrying out Tax Audit. Since, Total Income from Business is Rs. 1,01,00,000, therefore Tax Audit under section 44AB is applicable.