Virtual Digital Assets

The millennial and Gen-Z population is drawn to new investment and trading opportunities, giving rise to many Indians transacting in cryptocurrencies and Virtual Digital Assets. However, due to the lack of clarity from the Government of India, many were unsure about making any investments in these assets.

This topic found renewed interest recently when the Finance Minister, in her 2022 Budget, announced a 30% tax on income from Virtual Digital Assets. Additionally, the budget also proposed a Tax Deduction at Source (TDS) on payment or transfer made using Virtual Digital Assets at 1% above a monetary threshold.

But does that mean these Virtual Digital Assets are acceptable in India? Keep reading to find the answer!

What are Virtual Digital Assets?

In layman's terms, a virtual digital asset is a digital holding encrypted on the blockchain, allowing anyone to verify its authenticity and understand who owns it. Since this is non-fungible, i.e., it cannot be replicated, copied, or hacked, it becomes a unique asset that can be bought, sold, or transferred to a new owner.

Virtual Digital Assets include cryptocurrencies, Non-fungible tokens (NFTs), and Decentralized Finance (DeFi). The many NFTs in digital assets can be digital art, text, images, videos, music, virtual real estate / in-game tokens / in-game items, or other blockchain assets.

Virtual Digital Assets - Governmental Definition

• The Finance Bill introduced in 2022 defines “Virtual Digital Assets” under the new clause 47A. As per the bill, a virtual digital asset is any information or code or number, or token, generated through cryptographic means or otherwise.
• Although the Virtual Digital Assets mentioned in the Act are now taxable, the government also cautions citizens about making such transactions. Given its high fluctuation in price and virtual value (since there is no way to determine the value of a non-physical asset), it can be invested, transferred, stored, or traded electronically. However, it cannot be used as a financial transaction or be part of any investment scheme.
• The Act also announced a tax on profits of Virtual Digital Assets at 30%, regardless of it being held for the long-term or short-term. This tax cannot be exempted under any standard deduction, expenditure, or allowance.
• If the investor or trade incurs any losses, these cannot be offset against any other income as per standard income tax rules.

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Digital Virtual Assets Benefits

Cryptocurrencies and digital virtual assets have some benefits, but it also brings some threats and chances of innocent being duped.

Since it is untraceable, many harmful elements in society seem to be preferring this as a way of transaction, making RBI create strict regulations to scrutinize any transactions in NFT or crypto. This also increases risks due to fraud and discovery since the transaction cannot be traced as easily as a normal transaction can.

With higher taxes and a legitimate and well-regulated ecosystem, the RBI and the government can pave the way for crypto innovation and ensure its drawbacks can be nullified.

FAQ on Virtual Digital Assets

Q.1. What are Virtual Digital Assets?

Virtual Digital Assets are cryptocurrencies and Non-Fungible Tokens (NFTs), which ensure that a file, currency, code, or document created is uniquely identifiable and cannot be replicated in any form.

Q.2. What are some examples of Virtual Digital Assets?

Some common examples of Virtual Digital Assets include PDF documents, MP4 or MOV videos, Word Documents, Slide Decks, Powerpoint Presentations, Audio Files (WAV, AIFF, PCM) and Images (JPEG, PNG), Design Files (PSD), and Github Codes or Projects.

Q.3. What are Virtual Digital Assets used for?

As Virtual Digital Assets are uniquely identifiable and irreplicable, they are used to help artists and creators protect their work. In addition, these can be transferred to another user, and the new user becomes the only digital asset owner, making the creation valuable.

Q.4. Is Bitcoin a Virtual Digital Asset?

Yes, Bitcoin is a Virtual Digital asset that uses decentralized blockchain technology and is a virtual representation of the currency. Therefore, it can be digitally traded or transferred.

Q.5. Can someone in India invest in Virtual Digital Assets?

While the Reserve Bank of India (RBI) has warned citizens about the risks with virtual currencies and Virtual Digital Assets, there is no ban on buying, owning, or selling NFTs, cryptos, and other Virtual Digital Assets. However, business transactions in cryptocurrency are still not allowed, and selling any digital currency or virtual digital asset will incur a tax of 30% on the value.