Virtual Digital Assets and its views

What are virtual assets?

Before we jump right into the taxation system lets get into all the technical knowledge of what a virtual digital asset/virtual asset is. To know what virtual digital asset is you just need to split into its individual terms.

·??????Virtual – Not real

·??????Digital – Electronic means

·??????Asset – something with value

So simply put it’s a non-existent physical item with real world value. This concept itself feels unreal to a non-technical person. But most of the people who use these are from the non-technical crowd.

Now don’t confuse these with all the digital assets out there. Every virtual asset is a digital asset but not every digital asset is a virtual asset. While there are a variety of digital assets there are only few virtual assets per say

·??????Crypto currencies

·??????NFT (Non-fungible Tokens)

For now, these are the primary things that are considered virtual assets now lets dig deeper individually

Crypto currencies

A cryptocurrency is?a digital currency, which is an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system.

Ex: Bitcoin, Ethereum, doge coin

?

Non-fungible tokens

A non-fungible token (NFT) is?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.

Now this is where the scope of virtual digital assets expands to various things

·??????Gaming items and currencies like gold and elixir in clash of clans, or battle points in PUBG etc.

·??????Digital art works such as Bored apes, cyberpunks etc.

·??????Music artists like?3LAU selling artwork and music as NFT tokens

·??????Flims In May 2018,?20th Century Fox?partnered with Atom Tickets and released limited-edition?Deadpool 2?digital posters to promote the film. They were available from?OpenSea?and the GFT exchange. In March 2021?Adam Benzine's 2015 documentary?Claude Lanzmann: Spectres of the Shoah?became the first motion picture and documentary film to be auctioned as an NFT.

Technologies used to make them unique

Cryptography and block chain technology – For crypto currency

Cryptography, or cryptology, is the practice and study of techniques for secure communication in the presence of adversarial behavior.

Blockchain technology is?an advanced database mechanism that allows transparent information sharing within a business network. A blockchain database stores data in blocks that are linked together in a chain

Ex: Currencies like Bitcoin, Ethereum, doge coin

Tokenization – for NFT

Tokenization is the process of replacing sensitive data with unique identification symbols that retain all the essential information about the data without compromising its security.

Companies like Tzero, polymath etc.

Now what makes this different from other assets and how that they have unique is that they have specific codes/information/number present in them making them identifiable and which cannot be changed. This is uniqueness gives them a certain value due to its rare nature.

Now these not only have value but are auctioned in Christie's (a British?auction house)

Lets look at some examples like

·??????Clock — $52.7m.

·??????Beeple's HUMAN ONE — $28.985

·??????CryptoPunk #5822 — $23.7m

·??????CryptoPunk #7523 — $11.75m

·??????CryptoPunk #4156 — $10.26m

·??????CryptoPunk #3100 — $7.67m

·??????CryptoPunk #7804 — $7.6m

·??????Beeple's Crossroad — $6.6m

?

Now when this much value is generated from these items its logical to implement a tax system on those types of incomes as well this is where the Indian tax system comes in

?

Provision from financial act, 2022

The Finance Minister, while delivering her Budget Speech on Part B- Budget 2022-2023 on February 1, 2022, in the Lok Sabha stated in clause no. 131 as under: Scheme for taxation of virtual digital assets Assessment Year 2023-24 “131. There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.

Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent. No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition.

?Further, loss from transfer of virtual digital asset cannot be set off against any other income. Further, in order to capture the transaction details, I also propose to provide for TDS on payment made in relation to transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold.

?Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient.” Further, in order to provide for taxing the gifting of virtual digital assets, it is also proposed to amend Explanation to clause (x) of sub-section (2) of section 56 of the Act to inter-alia, provide that for the purpose of the said clause, the expression “property” shall have the meaning assigned to it in Explanation to clause (vii) and shall include virtual digital asset. In order to put the proposal in effect the critical and the important words used in the scheme have been defined as under: Section (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 of the Foreign Exchange Management Act, 1999 (42 of 1999.).]

?

Other nations’ stance

The governments across the world have taken differing views towards crypto assets. Some countries such as

·??????China have banned digital assets altogether. On the other hand, countries like El Salvador have embraced the new technology and declared it as their legal tender.

·??????For instance, in Singapore, the Payment Services Act of 2019 legalizes crypto and sets provisions to prevent illegal activity. From an income tax standpoint, businesses engaged in buying and selling digital tokens are taxed on the profit derived from trading in digital token. Pertinently, no taxes are levied if gains accrue from disposal of digital tokens held as long-term investments. So, Singapore has given VDA the status of a capital asset, unlike India.

·??????The US and Canada also construe cryptocurrency as a capital asset. Any income accruing from these assets is subjected to tax.

·???????The Canada Revenue Agency also has a system in place that tracks crypto investments and ensures accurate reporting of crypto investments and resulting tax liability.

·??????The UK levies capital gains tax or income tax on crypto gains depending upon the nature of the transactions.

·??????Australian government primarily considers crypto as an asset for capital gains tax purposes.

·??????In Germany, cryptocurrency is deemed to be a private asset attracting an individual Income Tax rather than a Capital Gains Tax only if it is sold in the year it was bought.

·??????In Portugal, crypto income is only taxable if it accrues from professional trading activity. Further, no tax is levied on the exchange of cryptocurrency for other currency which implies that buying or selling cryptocurrencies would not be subject to capital gain taxes or Value-Added Tax (VAT).

Countries that are in favor of crypto assets are either incorporating amendments to their existing tax codes or enacting a standalone law for addressing questions pertaining to such assets.