Introduction of a scheme for taxation of virtual currency or cryptocurrency and other digital assets, to be known as “Virtual Digital Assets” (“VDA”) has to be one of the biggest highlights of the Finance Bill, 2022 (“Bill”). Acknowledging the large-scale crypto trading that is taking place within the country, the Government has proposed to tax income generated from such transfer and trade of VDA at a rate of 30%. While some kind of regularisation of the income earned from trading of VDA is a welcome move, people from the field have expressed concern against such a high rate of tax. The Government has also announced the roll out of Central Bank Digital Currency (“CBDC”) to be issued by Reserve Bank of India (“RBI”) from the next Financial Year 2022-23 which shall be at par with the physical currency. Time is ripe for the Parliament to enact the Cryptocurrency Bill, 2022, which would bring further clarity to the legality of owning all types of cryptocurrencies in India. This, coupled with a fixed tax regime, would mark a milestone in digitalisation of the modern Indian economy.

What is cryptocurrency and NFT?

As per the Oxford Dictionary, a cryptocurrency is defined as “A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank”. It is not a traditional ‘currency’ but is a virtual or digital representation of money’s worth and not something which is available in a tangible and physical form. Cryptocurrency is based on block chain technology. Block chain technology is a distributed ledger which is open and records all transactions in code. In a simpler sense it is a kind of cheque book that’s distributed across countless computers all across the world.1

The Merriam-Webster Dictionary defines Non- fungible Token (“NFT”) as “a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership (as of a specific digital asset and specific rights relating to it)”.2, the online portal for one of the leading cryptocurrencies
– Ethereum, explains that NFTs are used to represent ownership of unique items, such as art, collectibles, and even real estate. NFTs can only have one owner at a time, which means no one can modify the record of ownership or copy/paste a new NFT into existence.3Thus, NFT is a token that is permanently linked to a piece and is encrypted by the artist’s signature, which validates the piece’s ownership and authenticity. NFT can be created out of any digital content.

The Bill proposes to group all kinds of virtual assets under the common head of VDA. This will include what is commonly known as crypto/virtual currency (except any national or foreign currency), NFTs and any other VDAs which the Central Government shall notify. Even though the Bill defines VDA to mean a digital representation of value, the Finance Minister has clarified in a post-budget interview that “a currency is a currency only when it is issued by the Central Bank, even if it is a crypto. But anything which is outside of that, loosely all of us refer to as cryptocurrency but they are not currency”.4

Proposed legislature on VDAs in India The latest draft legislation on virtual currency viz. Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (“Cryptocurrency Bill, 2021”) is still not available in the public domain. However, as per description provided, the Cryptocurrency Bill, 2021 seeks to prohibit all private cryptocurrencies in India while allowing for certain exceptions that promote the technology of cryptocurrency. It also creates a framework for digital currency that will be issued by the RBI.5 News reports suggest that, by way of the Cryptocurrency Bill, 2021 the government may impose a ban only on dealing in “private cryptocurrencies” in India, however, private cryptocurrency are not yet defined. The Cryptocurrency Bill, 2021 is also expected to provide a framework for the issue of digital currency, i.e., the CBDC through the RBI, which could be used as legal tender.

The Cryptocurrency Bill, 2021 was to be considered during the November, 2021 winter session of the Parliament but it was postponed to be taken up later. However, neither was it listed for debate during the recent 2022 budget session of the Parliament, as it is a complex subject and it will require more time, a Senior Finance Ministry Official has said. The Government is also awaiting technical inputs from the RBI after the pilot launch of its digital currency.6

Until the Cryptocurrency Bill, 2021 becomes an Act, we can only rely on the judgement of the Hon’ble Supreme Court in case of Internet and Mobile Association of India v. RBI [(2020) 10 SCC 274] which set aside the “Statement on Developmental and Regulatory Policies” issued by RBI on April 5, 2018.

Legislative intent behind amendments to the Income Tax Act, 1961 with respect to VDAs

India is one of the biggest markets for trading of cryptocurrencies and other digital assets in the world, while a specialised piece of legislation is still at discussion stage, the Government wanted to bring within its tax net all the unregulated income generated from such trade and transfers. The Budget Memorandum states that virtual assets are experiencing rising popularity and a substantial increase in trading volume.7 Similarly, the Finance Minister was quoted in a post-budget interview that the government is exercising its sovereign right to tax such transactions and profit making.8

Proposed Amendments to the Income Tax Act, 1961

The following amendments to the Income Tax Act, 1961 (“Act”) are proposed to be introduced through the Bill:

  1. A new clause i.e., (47A) which defines VDA is proposed to be inserted in section 2 of the Act. As per the said clause, a VDA is proposed to mean (a) any information or code or number or token (not being Indian or Foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value which is 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 and includes its use in any financial transactions or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically; (b) a non-fungible token (means such digital assets as notified by the Central Government) and; any other token of similar nature; (c) any other digital assets as the Central Government may by notification in the Official Gazette specify; are included in the definition. However, the Central Government can notify such assets which shall not be a part of VDA for the purpose of this section.9

    This means that virtual digital assets are classified as a capital asset for the purpose of the Act. Accordingly, section 45 of the Act would be attracted and any profits or gain arising from such transfer would be chargeable to income tax under the head “Capital Gain” and shall be deemed to be the income of the previous year in which the transfer took place.

    Investors are required to pay income tax based on the nature of VDAs transactions. If there is an intention of doing frequent trades and high volumes, gains from the VDAs will be taxed as “business income”. However, if the intention is primarily to hold them and earn longer- term appreciation then gain from such VDAs will be taxable as “capital gain”.

  2. Section 56(2)(x) provides taxability of any sum of money or immoveable property received with or without consideration under the heading “Income from other sources”. As per the proposed amendment, the term “property” as defined in Explanation to clause (vii) shall include VDA. 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.

    The Explanation to clause (vii) defines the term “property” as the capital asset of the assessee for the purpose of this section. Thereby, if one receives VDA as a gift, he/she will be liable to pay tax under the head “Income from other source” u/s 56 of the Act.

  3. Section 115BBH is proposed to be introduced with effect from the 1st day of April, 2023. Accordingly, where the total income of an assessee includes any income from the transfer of any VDA, income tax shall be chargeable at the rate of 30% on such transfer, along with the amount of income tax which the assessee would have been chargeable on income as reduced by the income arising on transfer of VDAs. Further, as per sub- section (2), (a) 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; (b) no set off of loss from transfer of the VDA shall be allowed to be set-off with any other income or to be carried forward to succeeding assessment years.

    With effect from 1st April, 2023; transfer of VDAs would attract the levy of income tax at the flat rate of 30%. This would mean the benefit of slab rate is not available to a person. Further, deduction is available only for the cost of acquisition. Similarly, loss arising from VDAs would be set off from the income of VDAs and not from any other income. No carry forward of any losses from transfer of VDAs is permitted.

  4. Section 194S is proposed to be introduced with effect from the 1st day of July, 2022. Thus, any person responsible for paying to a resident any sum by way of consideration for transfer of a VDA, shall at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier, deduct an amount equal to 1% of such sum as income tax thereon, known as Tax Deducted at Source (“TDS”) or Withholding Tax. However, where consideration is in kind or partly in kind, the person responsible for paying such consideration shall, before releasing the consideration, ensure that tax has been paid in respect of such consideration for the transfer of the VDA.

    This implies that tax has to be deducted on transfer of VDAs to the resident at the rate of 1% of such sum. The liability to deduct tax will prevail even when consideration is in kind or partly in kind. Thus, any person making the payment shall ensure that tax has been paid in respect of such consideration. Further, no tax is to be deducted in case the payer is the specified person or the aggregate of such value of a consideration to a resident is less than Rs 50,000 during the financial year. In any other case, the said limit is proposed to be Rs 10,000 during the financial year.

Representation made to the Government:

In an era of digitalization, the Government has recognized cryptocurrencies as VDAs and proposed to tax the profit earned through transactions involving VDAs by enforcing the above-mentioned proposed amendments. However, bringing crypto transactions within the higher tax bracket has put a lot of investors in discontent. The major stakeholders of the cryptocurrency industry have decided to seek a revision of the tax rate from the government. This proposal will be headed by the Blockchain and Crypto Assets Council (“BACC”).10 The two major concerns being faced by the crypto industry include (i) a grievance against the tax rate being fixed at 30%, instead suggesting that it be brought at par with other asset classes depending on the income levels of the investors; (ii) another concern revolves around TDS implications, since it will add a huge compliance burden upon crypto exchanges, which will have to produce records at every transaction.

Comparison with existing global tax regimes

While cryptocurrencies and NFTs are being taxed for the first time in the Indian economy, virtual assets have been defined as subject to tax in various jurisdictions around the world. A few regulations have been highlighted below, comparing the proposed taxation and imposition of withholding tax in India vis-a-vis prevalent practises in other economies,

  1. USA

    Cryptocurrencies are treated as property in the US and regulated under the categories of capital assets. Consequently, any gains on the sale of the virtual currency are taxed by the Internal Revenue Service (“IRS”) as capital gains. “Virtual currency” is defined as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency but is not given the status of legal tender.11 This understanding is broadly similar to the definition of VDAs under the Bill in India.

    In juxtaposition to the Indian decision to impose a single tax rate upon transfer of VDAs, the US regime imposes taxes in a range from 0% to 37%, depending upon whether the virtual currency was held short-term, for a period of less than 12 months or long-term.12 Additionally, tax is also imposed upon mining of virtual currency in the US, whereas no such provision has been provided in India so far.

    While India has categorically prohibited set off of losses from transfers involving VDAs, any losses arising in the US can be set off upto $3,000.13

  2. UK

    While there is no specific tax imposed on cryptocurrencies in the UK, profits made on transactions involving cryptocurrencies are either taxed as capital gains or income tax in the hands of individuals. A manual published by Her Majesty’s Revenue & Customs (“HMRC”) explains the term “cryptoassets” to include cryptographically secured digital representations of value or contractual rights that can be transferred, stored, traded electronically, using some form of Distributed Ledger Technology.14 When compared to the definition of VDAs proposed in India, it is uncertain whether cryptoassets in the UK shall include NFTs since HMRC has not issued any guidance on the same.

    Individuals belonging to the UK, are liable to income tax on cryptoassets received from their employers as a form of non- cash payment and any mining, transaction confirmation or airdrops.15 An individual who is trading may reduce their income tax liability by offsetting any losses from their trade against future profits or other income, or may carry it forward16, contrary to the proposal in India. The tax rates range from 20% to 45% based upon each slab17, rather than a fixed rate as proposed vide the Bill in India.

    With regard to capital gains tax in the UK, cryptoassets or tokens are classified as assets and attract capital gains tax when disposed of for profit.18 The tax- free allowance for capital gains tax is £12,300, gains above which will be taxed at 10% upto the basic rate tax band, if available, and 20% on gains at the higher and additional tax rates.19

  3. Canada

    The taxation of cryptocurrencies in Canada is different from the above countries, since cryptocurrencies are taxed as either business income or capital gains, and when cryptocurrencies are used to pay for goods or services, the transaction is taxed with GST, in the form of a barter. The Canada Revenue Agency (“CRA”) defines cryptocurrency as a digital representation of value that is not legal tender. It is a digital asset, sometimes also referred to as a crypto asset or altcoin that works as a medium of exchange for goods and services between the parties who agree to use it and operates independently from a central bank.20

    While, in Canada, possessing or holding cryptocurrencies is not a taxable event, disposition of cryptocurrencies by way of sale, gift, conversion to currency, etc. is taxable. If the same is carried on repeatedly for commercial reasons with the intention to create profits, it is likely that the disposition would be taxed as business income at rates extending from 15% to 33%,21 or if not carried out repeatedly as a commercially viable option, then it would be taxed as capital gains on 50% of any profits on the disposition.22 This is vastly different from the proposal envisogned for taxing VDAs in India at a fixed rate.

  4. Germany

    The regulations relating to cryptocurrencies in Germany are far more relaxed than global standards, and cryptocurrencies are treated as private assets or “Privatvermögen”, attracting individual slabs of income tax rather than capital gains. Germany may be considered as a crypto tax haven due to low tax rates and exemption benefits. The country is further set to notify a new law regulating cryptocurrencies in March, 2022.23

    One of the most attractive features of Germany’s tax regime is that no tax is imposed on a sale or transfer of cryptocurrency after one year of holding and neither does a requirement for reporting such a transaction exist. With regard to sale within a year of purchase, profits made upto 600 euros are tax exempt on individual sales.24 The tax slabs range from 0% to 45%. Mining is also taxable on an income net expense basis. Further, losses arising from cryptocurrency transactions may be set off or carried forward25, which is not the case in India.

  5. Australia

    The Australian Taxation Office (“ATO”) refers to a cryptocurrency as a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain, without involvement of a central bank.26 In comparison to this, the proposed definition in the Indian context is far wider and includes NFTs. Taxation of cryptocurrency transactions in Australia falls mainly under the two heads of business income and capital gains, however, reporting is to be undertaken for all types of transactions.27 When a transaction, which is commercial in nature is made with an intention to generate profits, it would generally be liable to tax as business income, including mining.28 Whereas a capital gains tax event occurs when cryptocurrency is disposed of, in the manner of a sale, gift, trade, exchange,etc. If the currency is held for the period of 1 year prior to disposing it of, 50% of the capital gains would be exempt from tax.29 the tax rates range from 0% to 45%.30 This is in stark contrast to the proposal in India to tax any transaction involving transfer of VDAs, irrespective of its value.


Although the proposed amendments sought to be brought about vide the Bill in India, are a step forward in the right direction, mere taxation of VDAs will not imply that they have been granted legal status since the Indian Income Tax Department also taxes illegal incomes. Therefore, a more holistic view must be awaited from the Indian government, which may be seen upon passage of the Cryptocurrency Bill, 2021 as well as the introduction of the official CBDC by the RBI. india-cryptocurrency-bill markets/cryptocurrency/digital-tax-fine-but- what-about-crypto-money-laundering-via-dark- web/articleshow/89399578.cms markets/cryptocurrency/budget-gives-crypto- some-clarity-but-more-importance-to-digital- rupee/articleshow/89297455.cms t ec h / te c hn o l og y /c r yp t o- e xc h a ng e s- to-brief-policymakers-on-tds-tangles/ articleshow/89372406.cms virtual-digital-assets-vs-digital-currency- explained-7752936/lite/

https://indianexpr business/budget/budget-interview-nirmala- sitharaman-7752334/







  6. time-to-build-consensus/articleshow/88962285.cms.

  7. Memorandum explaining the provisions in the Finance Bill, 2022.

















  24. Sections 22 and 23(3), German Income Tax Act (Einkommensteuergesetz) referred to in crypto-taxes-in-germany/.

  25., wherein reference is made to german draft, available at: https://



  28.—specifically- bitcoin/?page=3#Cryptocurrency_businesses.



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