What is Virtual Digital Assets , Explained with example

(Last Updated On: February 24, 2023)

What is virtual digital assets , Explained

Normally it is asked What is Virtual Digital Assets ?

As per Section 2(47) of Income tax Act , Virtual Digital Assets defination is as follow

(47A)

“virtual digital asset” 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;
(c)		any other digital asset, as the Central Government may, by notification in the Official Gazette specify:
		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.

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;
(b)		the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2^16b of the Foreign Exchange Management Act, 1999 (42 of 1999);]

Examples of Virtual Digital Assets

Cryptocurrencies: Bitcoin, Ethereum, Litecoin, and other cryptocurrencies are virtual digital assets that are stored and transferred electronically.
Non-Fungible Tokens (NFTs): These are unique digital assets that are used to represent ownership of digital art, music, videos, and other creative works.

Income Tax on Virtual Digital Assets

Virtual Digital Asset (VDA) covers crypto assets, Non-fungible tokens (NFTs), and any other digital asset, and it does not cover Indian currency, CBDCs, Foreign currency, and notified digital assets. The Finance Act, 2022 introduced a new’ flat rate’ scheme for the taxation of income arising from the transfer of Virtual Digital Assets (‘VDA’) with effect from the assessment year 2023-24.

Every transfer of virtual digital assets on or after 01-04-2022 shall be covered under this scheme.

TDS on Virtual Digital Assets

Further, Section 194S of Income Tax Act requires the deduction of tax from the payment of consideration on the transfer of VDA. Read Section 194S Income Tax for TDS on Payment on transfer of virtual digital asset.

Disclosure of Virtual Digital Assets in ITR

To bring the necessary changes to the new ITR Form, Schedule VDA has been added from AY 2023-24

The Schedule asks for details like the date of acquisition, date of transfer, head under which income is to be taxed, cost of acquisition in case of gift and consideration received.

Taxable income will be recorded in Schedule CG (Capital Gains) or Schedule BP (Business Income) based upon the classification of income under the head of capital gains or business income.

Gifts of Virtual Digital Assets

Gifts of Virtual Digital Assets will be taxable in the hand of Recipient.

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