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Section 115BBH: Taxation on Virtual Digital Assets


What is Virtual Digital Asset?

As per Section 2(47A)  Virtual Digital Assets proposed to be inserted vide new clause 47A to the section 2 of the Act, where Virtual Digital Assets are defined to cover assets with the following features:

Any information, code, 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.

One of the highlights of Budget 2022 was the provisions pertaining to taxation of Virtual Digital Asset, in other words, cryptos and NFTs. Cryptocurrency (hereinafter referred to as ‘crypto’) has been one of the investment options for millennials of late. Crypto has attracted a lot of risk aggressive investors and traders, who seek to increase their profits or capital appreciation making use of the volatility prevalent in the crypto market. However, such platforms can also provide an opportunity for generation of dirty money, money laundering, funding illegal and terrorist activities and can also cause the “country’s available capital” to evaporate if the volatility is unfavourable.

Taxation of Virtual Digital Asset:

Finance Bill 2022 proposes a special scheme of taxation for virtual digital assets. A new Section 115BBH is proposed to be inserted for the taxation of virtual digital assets.

Section 115BBH

Where the total income of an assessee includes any income from the transfer of any virtual digital asset, the income-tax payable shall be the aggregate of:

1. the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of 30%.; and

2. 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)

Notwithstanding anything contained in any other provision of this Act

1. no deduction in respect of any expenditure (other than cost of acquisition) 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

2. 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 other provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.

Gift of Virtual Digital Asset

Section 56(2)(x) of the Income Tax Act outlines provisions pertaining to gift of money, movable and immovable properties for inadequate or no consideration. An Explanation to the Section 56(2)(x) is proposed to be amended which clarifies that property includes virtual digital assets.

Analysis of taxation on Virtual Digital Assets:

1. The Finance Bill 2022, taxes the income from transfer on virtual digital assets at a flat rate of 30% in the hands of the transferor. Cess on the basic tax would prevail.

2. Gift of virtual assets are also taxed in the hands of the receiver as per the provisions of Section 56(2)(x) of the Income Tax Act.

3. Further, no deduction or allowance of any expenditure incurred with respect to the transfer of such virtual digital asset is allowed as a deduction from the income.

4. This is an important clause since it address the issues of taxation of Virtual Digital Assets irrespective of the Head of Income under which it is proposed to be offered by the assessee.

5. Cost of acquisition is allowed as a deduction from the income from such transfer of VDA.

6. Further, where an assessee has income from multiple sources or heads, loss from any other source or head of income shall not be allowed to be set off with the income from the transfer of virtual digital asset.

7. Further, if an assessee has incurred loss on transfer of VDA, then the assessee shall not be eligible to set off such loss with income from any other source or head under the provisions of Income Tax Act.

8. Such loss from transfer of VDA will not be eligible to be carried forward to subsequent assessment years.

Applicability of this Section:

This amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.

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