{"id":157604,"date":"2025-03-04T19:24:45","date_gmt":"2025-03-04T13:54:45","guid":{"rendered":"https:\/\/pwonlyias.com\/stage\/?post_type=current-affairs&#038;p=157604"},"modified":"2025-03-04T19:24:45","modified_gmt":"2025-03-04T13:54:45","slug":"virtual-digital-assets","status":"publish","type":"current-affairs","link":"https:\/\/pwonlyias.com\/stage\/current-affairs\/virtual-digital-assets","title":{"rendered":"Virtual Digital Assets"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">India has <\/span><b>introduced a comprehensive legal framework for Virtual Digital Assets.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">In its recently introduced <\/span><b>Income Tax Bill, 2025 <\/b><span style=\"font-weight: 400;\">aligning the country\u2019s tax structure with global precedents.<\/span><\/p>\n<h2><span style=\"font-size: 18pt;\"><b>Virtual Digital Assets as Property and Capital Assets<\/b><\/span><\/h2>\n<ul>\n<li><b>Section 92 (5)(f)): The Income Tax Bill, 2025<\/b><span style=\"font-weight: 400;\"> has<\/span><b> explicitly termed VDAs as property <\/b><span style=\"font-weight: 400;\">under this section aligning India with global practices,\u00a0<\/span>\n<ul>\n<li><b>Digital assets are either classified as securities<\/b><span style=\"font-weight: 400;\"> (like in the U.S.) <\/span><b>or property <\/b><span style=\"font-weight: 400;\">(like in the U.K., Australia, and New Zealand).<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Section 76(1):<\/b><span style=\"font-weight: 400;\"> The section <\/span><b>classifies VDAs as capital assets,<\/b><span style=\"font-weight: 400;\"> ensuring these transactions<\/span><b> are subject to standard asset taxation principles, <\/b><span style=\"font-weight: 400;\">preventing their misuse as unregulated financial instruments.<\/span>\n<ul>\n<li><b>Any short\/long term gains arising from their sale, transfer, or exchange will be taxed under Capital Gains Tax <\/b><span style=\"font-weight: 400;\">provisions.<\/span>\n<ul>\n<li><b>Example: <\/b><span style=\"font-weight: 400;\">If an individual purchases Bitcoin at \u20b910 lakh and sells it for \u20b920 lakh, the<\/span><b> \u20b910 lakh profit will be subject to capital gains tax.\u00a0<\/b><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li><b>VDA Transfers: <\/b><span style=\"font-weight: 400;\">The bill imposes <\/span><b>a flat 30% tax on income from VDA transfers with no deductions for expenditure or allowance <\/b><span style=\"font-weight: 400;\">(other than the cost of acquisition) being allowed unlike traditional capital assets.<\/span>\n<ul>\n<li><b>No Deduction:<\/b><span style=\"font-weight: 400;\"> Expenses<\/span><b> related to mining, transaction fees, platform commissions, and gas fees cannot be deducted <\/b><span style=\"font-weight: 400;\">when calculating taxable income.<\/span><\/li>\n<li><b>Example:<\/b><span style=\"font-weight: 400;\"> If an investor buys <\/span><b>Ethereum for \u20b95 lakh and sells it for \u20b97 lakh, the \u20b92 lakh profit is taxed at a flat 30% <\/b><span style=\"font-weight: 400;\">with no relief for transaction costs.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Section 393: A 1% TDS (Tax Deducted at Source)<\/b><span style=\"font-weight: 400;\"> on transfers of VDAs is also imposed even <\/span><b>in peer-to-peer (P2P) transactions<\/b><span style=\"font-weight: 400;\"> to track large crypto transactions.<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">The <\/span><b>threshold for TDS exemption is \u20b950,000 for small traders <\/b><span style=\"font-weight: 400;\">and \u20b910,000 for others.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Section 301: <\/b><span style=\"font-weight: 400;\">VDAs are also included in<\/span><b> undisclosed income taxation and asset seizure regulations. <\/b><span style=\"font-weight: 400;\">VDAs can be<\/span><b> classified as undisclosed income and taxed accordingly<\/b><span style=\"font-weight: 400;\">\u00a0 if an individual fails to report VDA holdings in their tax filings.<\/span><\/li>\n<li><b>Section 524(1): I<\/b><span style=\"font-weight: 400;\">t allows tax authorities<\/span><b> to seize VDAs during investigations or tax raids, similar to how cash, gold, or real estat<\/b><span style=\"font-weight: 400;\">e is confiscated in cases of tax evasion.<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">It aims to ensure that<\/span><b> crypto-assets do not remain a shadow asset class, immune from regulatory oversight.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Section 509:<\/b> <b>Any entity which deals in crypto assets<\/b><span style=\"font-weight: 400;\"> (exchanges, wallet providers, and even individual traders) are required<\/span><b> to report transactions in a prescribed format.<\/b>\n<ul>\n<li><b>Aim:<\/b><span style=\"font-weight: 400;\"> To mandate <\/span><b>compliance from platforms facilitating crypto trades,<\/b><span style=\"font-weight: 400;\"> making it harder to launder money through digital assets.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Inclusion in\u00a0 Annual Information Statements (AIS): <\/b><span style=\"font-weight: 400;\">The bill also mandates that VDAs be <\/span><b>included in Annual Information Statements (AIS), ensuring that all crypto transactions are automatically recorded<\/b><span style=\"font-weight: 400;\"> in taxpayers\u2019 financial profiles.<\/span><\/li>\n<li><b>Significance of the Move:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">To ensure that <\/span><b>VDAs do not exist in a legal grey area.<\/b><\/li>\n<li><span style=\"font-weight: 400;\">India g<\/span><b>ains the ability to tax, regulate, and seize crypto assets <\/b><span style=\"font-weight: 400;\">when necessary, preventing their <\/span><b>misuse for illicit financial activities<\/b><span style=\"font-weight: 400;\"> by defining them as property.<\/span><\/li>\n<li><b>Aligning its tax structure with international legal standards.<\/b><span style=\"font-weight: 400;\">\u00a0<\/span>\n<ul>\n<li><b>Example: <\/b><span style=\"font-weight: 400;\">The <\/span><b>United States SEC classifies many crypto assets as securities, <\/b><span style=\"font-weight: 400;\">bringing them under financial market regulations.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li><b>Challenges:<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Policy Framework: <\/b><span style=\"font-weight: 400;\">There is a<\/span><b> lack of a clear and comprehensive regulatory framework<\/b><span style=\"font-weight: 400;\"> for VDAs integrating financial regulations, consumer rights, and technological advancements.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Ancillary Areas:<\/b><span style=\"font-weight: 400;\"> Such as<\/span><b> investor protection, market regulation, enforcement mechanisms, and a lack of standard guidelines a<\/b><span style=\"font-weight: 400;\">lso need to be addressed beyond\u00a0 taxonomy and taxation\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Discouraging Taxation: T<\/b><span style=\"font-weight: 400;\">he tax <\/span><b>treatment of flat 30% without provisions for deductions\u00a0 is quite harsh<\/b><span style=\"font-weight: 400;\"> which can <\/span><b>discourage investments in VDAs<\/b><span style=\"font-weight: 400;\"> and hamper its development.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><b>Example: The Virtual Assets Regulatory Authority (VARA) of UAE<\/b><span style=\"font-weight: 400;\"> allows businesses and individuals to hold and trade VDAs under regulated conditions, with 0% personal income tax on gains in certain cases.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>About Virtual Digital Assets<\/b><\/span><\/h2>\n<ul>\n<li><b>Virtual Digital Assets refer to any digital representation of value that can be digitally traded, transferred or used for payment. <\/b><span style=\"font-weight: 400;\">It does not include digital representation of fiat currencies.<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">It includes <\/span><b>any information, code, number or token not being Indian or foreign currency,<\/b><span style=\"font-weight: 400;\"> and generated t<\/span><b>hrough cryptographic means<\/b><span style=\"font-weight: 400;\"> or others.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Types:\u00a0<\/b>\n<ul>\n<li><b>Crypto Assets: <\/b><span style=\"font-weight: 400;\">Digital <\/span><b>currencies that use cryptography for security <\/b><span style=\"font-weight: 400;\">and control the creation of new units, enabling secure and decentralized transactions.\u00a0<\/span>\n<ul>\n<li><b>Usage: I<\/b><span style=\"font-weight: 400;\">t can be used for, Investments; Payments and creating a coin to fund a project<\/span><\/li>\n<li><b>Examples: Bitcoin, Ethereum, Litecoin<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Stablecoins: A<\/b><span style=\"font-weight: 400;\"> type of cryptocurrency <\/span><b>designed for price stability. Its prices are linked to fiat currencies, commodities or other crypto assets.<\/b>\n<ul>\n<li><b>Usage: <\/b><span style=\"font-weight: 400;\">Payments; Foreign exchange; Cross-border payments and transfers<\/span><\/li>\n<li><b>Example:\u00a0 Tether or USD Coin.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Non-fungible tokens (NFTs): <\/b><span style=\"font-weight: 400;\">It is a <\/span><b>token which represents ownership of a unique digital item<\/b><span style=\"font-weight: 400;\"> (art, a government ID, music, videos, or even real estate etc). An NFT certifies that th<\/span><b>e holder owns the underlying digital asset and can sell, trade or redeem it.<\/b>\n<ul>\n<li><b>Usage:<\/b><span style=\"font-weight: 400;\"> Proving your <\/span><b>identity and granting access (<\/b><span style=\"font-weight: 400;\">to either a virtual or physical space); <\/span><b>Tokenizing supply chain to track inventory moveme<\/b><span style=\"font-weight: 400;\">nt and ownership; <\/span><b>Ownership of virtual items (games, avatars, virtual land)<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Decentralized Finance (DeFi): <\/b><span style=\"font-weight: 400;\">It is a range of f<\/span><b>inancial applications built on blockchain technology that aim to provide decentralized and permissionless<\/b><span style=\"font-weight: 400;\"> access to financial services.<\/span>\n<ul>\n<li><b>Usage:<\/b><span style=\"font-weight: 400;\"> Enable users to access financial services without traditional intermediaries, such as banks or financial institutions.<\/span><\/li>\n<li><b>Examples: Lending platforms, borrowing platform<\/b><span style=\"font-weight: 400;\">s, and decentralized exchanges.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Security Tokens: <\/b><span style=\"font-weight: 400;\">Digital assets that <\/span><b>meet the definition of a security or financial investment, like stocks and bonds.<\/b>\n<ul>\n<li><b>Usage: T<\/b><span style=\"font-weight: 400;\">okenized versions of stocks (equity) and bonds; Tokenized versions of real world assets (real estate, property, plant, and<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Central Bank Digital Currency (CBDC)<\/b><span style=\"font-weight: 400;\">: It\u00a0 is a digital currency <\/span><b>sanctioned by central banks and is linked to the value of the issuing nation\u2019s official fiat currency.<\/b>\n<ul>\n<li><b>Usage: I<\/b><span style=\"font-weight: 400;\">t enables faster and <\/span><b>more efficient payments, increasing financial inclusion, <\/b><span style=\"font-weight: 400;\">and enhancing monetary policy tools for central banks.<\/span><\/li>\n<li><b>Example: The Digital Yuan of People\u2019s Bank of China<\/b><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li><b>Virtual Digital Assets V\/S Digital Currency:<\/b><span style=\"font-weight: 400;\"> A Digital currency<\/span><b> has to be issued by the central bank of a country only even if it is a crypto.<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">All the other virtual assets , also private cryptocurrencies are referred to as Virtual Digital assets.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-157579 \" src=\"https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2025\/03\/46-67c6fc4c5a60d-e1741096464188.webp\" alt=\"Virtual Digital Assets\" width=\"700\" height=\"335\" srcset=\"https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2025\/03\/46-67c6fc4c5a60d-e1741096464188.webp 1243w, https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2025\/03\/46-67c6fc4c5a60d-e1741096464188-300x143.webp 300w, https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2025\/03\/46-67c6fc4c5a60d-e1741096464188-1024x489.webp 1024w, https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2025\/03\/46-67c6fc4c5a60d-e1741096464188-768x367.webp 768w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/p>\n<div class=\"vc_table_green\"><\/p>\n<table style=\"width: 99.6375%;\">\n<tbody>\n<tr>\n<td style=\"width: 111.19%; 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