Virtual Digital Assets

Context: The finance ministry recently placed all the transactions involving virtual digital assets under the Prevention of Money Laundering Act (PMLA) purview.

Definition of VDA under the Finance Act 2022

  • Any information/code/number/token generated through cryptographic means providing a digital representation of value exchanged with or without consideration. Virtual Digital Assets can be transferred, stored or traded electronically. They can have some inherent value or function as a store of value or Unit of Account or Used for Financial Transaction or Investment.
  • Non-fungible token.
  •  Any other digital asset as notified by Central Government. Currencies such as Central Bank Digital Currency or any other foreign currency is excluded from this tax.
  • Centre government has power to exclude any digital asset from the definition of Virtual Digital Asset.

                     E.g., Bitcoin and other similar Altcoins such as Ethereum, Ripple, Dogecoin etc.

Taxation of Virtual Digital Assets:

  • Any income arising from the transfer of virtual digital assets will attract tax on the capital gains at the rate of 30%. Additionally, a withholding tax at the rate of 1% will be applicable on the sale of virtual digital assets, if such sale consideration cumulatively exceeds INR 10,000 (approx. USD 130) in any financial year.
  • Expenses associated with acquiring, holding or selling virtual digital assets are not deductible from the gains arising from their transfer when determining the tax incidence. 

E.g., Cost of crypto mining or any other cost cannot be shown as expense to reduce the profit.

  • Loss from transfer of virtual digital asset cannot be set off against any capital gain made from any other sources like Housing property/shares while paying capital gains tax.
  • Gifts of virtual digital assets would also be taxable.

VDA under PMLA:

  • The government brought all the transactions involving crypto assets under the Prevention of Money Laundering Act.
  • Nature of transactions to be covered under PMLA:
  • Exchange of virtual digital assets (“VDAs”) with fiat currencies or other VDAs;
  • Transfer of VDAs;
  • Provide safekeeping or administration of VDAs or instruments that enable control over VDAs; and
  • Participate and provide financial services related to an issuer’s offer and sale of VDAs.
  • All the individuals/instituions involved in the above transactions are required to implement KYC procedure to verify identity of their clients.
  • They are also required to maintain a record of certain transactions for at least 5 years from the date of each such transaction.
  • Indian crypto exchanges will have to report suspicious activity to the Financial Intelligence Unit India (FIU-IND).

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