India Taxes and Regulates Virtual Digital Assets

Source: The post India Taxes and Regulates Virtual Digital Assets has been created, based on the article “The implications of treating Virtual Digital Assets as taxable properties” published in “The Hindu” on 4th March 2025.

UPSC Syllabus Topic: GS Paper3- Economy

Context: The article explains how India’s Income Tax Bill, 2025, classifies Virtual Digital Assets (VDAs) like crypto and NFTs as property and capital assets. It details their taxation, reporting rules, and aligns India’s approach with global standards for better regulation.

For detailed information on Virtual digital assets(VDAs) and India’s stand on it read this article here

How does India classify Virtual Digital Assets (VDAs) in the Income Tax Bill, 2025?

1. India’s Income Tax Bill, 2025, defines VDAs in Section 2(111) and classifies them explicitly as property (Section 92(5)(f)) and capital assets (Section 76(1)) for the first time.
2. This classification includes crypto assets, Non-Fungible Tokens (NFTs), and similar digital assets.
3. The move aligns India’s approach with countries like the U.K., Australia, and New Zealand, which treat digital assets as property, and the U.S., where many crypto assets are considered securities.

How are VDAs taxed under the new bill?

1. The bill continues the 30% tax on income from VDA transfers, introduced in 2022.
2. No deductions are allowed except for the cost of acquisition, which means expenses like mining, transaction fees, and platform commissions cannot be deducted.
3. For example, if someone sells Ethereum bought for ₹5 lakh at ₹7 lakh, the ₹2 lakh profit is taxed at a flat 30%, with no relief for transaction costs.
4. This tax treatment is stricter compared to the UAE, where some VDA gains are not taxed. Additionally, a 1% TDS (Tax Deducted at Source) applies on VDA transfers, even in peer-to-peer (P2P) transactions.
5. The exemption threshold for TDS is ₹50,000 for small traders and ₹10,000 for others.

What are the reporting and compliance requirements for VDAs?

1. Section 301 mandates that individuals report VDA holdings in tax filings. Unreported VDAs can be taxed as undisclosed income.
2. Section 524(1) empowers tax authorities to seize VDAs during investigations or tax raids, similar to the seizure of cash, gold, or real estate. This is in line with practices in the U.K., where courts can freeze or seize crypto assets.
3. Section 509 requires entities dealing in VDAs, including exchanges and individual traders, to report transactions in a prescribed format.
4. VDAs must also be included in Annual Information Statements (AIS) to ensure all crypto transactions are recorded.

How does India’s approach align with global standards?

1. India’s classification of VDAs as property and capital assets aligns with practices in the U.K., Australia, New Zealand, and the U.S.
2. This helps in taxing, regulating, and seizing VDAs, preventing their misuse for illicit activities.
3. However, despite these developments, India lacks a comprehensive regulatory framework for VDAs.
4. Key areas like investor protection, market regulation, and enforcement mechanisms remain unaddressed, highlighting the need for a more cohesive policy approach.

Question for practice:

Examine how the Income Tax Bill, 2025, classifies and regulates Virtual Digital Assets (VDAs) in India, and how this approach aligns with global standards.