Pre-Budget 2025 expectations on Taxation of Virtual Digital Assets

Pre-Budget 2025 discussions highlight the need for clarity in taxation laws concerning Virtual Digital Assets (VDAs). Ambiguities exist in determining the “Cost of Acquisition” (COA) for VDAs held as capital assets or inventory. While Section 115BBH(2)(a) allows COA deduction, it lacks clear computation guidelines. Suggestions include aligning COA for capital assets with Sections 49 and 55 and using Section 145A(i) for inventory valuation. For VDAs stored in digital wallets, a standardized computation method, such as FIFO, Weighted Average, or LIFO, should be specified. In cases of VDAs received as gifts, clarification is needed on whether the Fair Market Value taxed under Section 56(2)(x) qualifies as COA for future transfers. Additionally, the non-allowance of setting off losses from one VDA against gains from another remains a significant investor concern, potentially discouraging market participation. For non-residents, determining the situs of VDAs for tax purposes is another unresolved issue, requiring guidance on whether the location of the seller, buyer, or exchange governs taxability. Lastly, defining “property” in Section 56(2)(x) to explicitly include VDAs can enhance legal consistency and ensure proper tax treatment. These clarifications aim to address investor concerns and ensure consistent tax practices in this emerging asset class.

Clarification on determination of “Cost of Acquisition(COA)” where VDAs are held as ‘Capital Asset’ or ‘Inventory’:

The taxpayer may hold the VDA as ‘Capital Asset’ or ‘Stock in Trade’ although Sec 115BBH does not make any such distinction. As per the current provisions contained under Sec 115BBH(2)(a) of the Income Tax Act, 1961 it provides that no deduction is allowable in respect of expense or allowance or set-off of any loss in computing income from transfer of VDA except for “Cost of Acquisition”, if any. The exact scope of “Cost of Acquisition” has not been defined which can result in ambiguity.

Hence, as a part of suggestion it may be clarified as to how the COA shall be computed in respect of the VDAs. For VDAs held as capital asset, it may be clarified that “cost of acquisition” will be determined as per Sec 49 and Sec 55, which will be consistent with the meaning of ‘Transfer’ borrowed from Sec 2(47). And in case where VDA is held as inventory, in order to provide consistency of tax treatment by all taxpayers, it may be clarified that “cost of acquisition” of such inventory has to be determined on the basis of Sec 145A(i) read with ICDS II (Valuation of Inventories).

Manner of computation of “COA” in case of VDAs held in respective ‘Digital Wallets’:

Section 45(2A) mandates FIFO method for ‘Securities’ held in Demat Account. But in case the VDAs are stored in digitalwallets (like crypto currency wallet, coin base, exodus, coinomi, etc.), the issue which requires clarification is which method to be mandatorily applied by the taxpayers for VDAs stored in Digital Wallets in order to compute the COA. Whether, the taxpayer should apply FIFO, Weighted Average or LIFO basis?

Clarification on determination of “Cost of Acquisition (COA)” where VDAs are received as ‘Gift’:

S.56(2)(x) provides that where VDA is received for NIL or inadequate consideration, the difference between FMV and consideration will be taxed as income in hands of recipient. It is recommended to clarify that in context of VDA, as whether the FMV which is taxed in hands of recipient u/s. 56(2)(x) shall be treated as ‘cost of acquisition’.

Set off of loss from Virtual Digital Asset against the gains from the transaction of another Virtual Digital Assets:

Losses incurred from one kind of virtual digital assets (VDAs) should be allowed to set off against the gains from any transaction involving another VDA while computing tax. Non-allowance of set off Virtual Digital Assets (VDA) has been very harsh on investors and has negative impact on market.

Situs for Non-Residents (NRs) earning income from transfer of VDAs:

In case the non-resident sells VDA through an Indian crypto exchange or where non-resident sells VDA directly to a resident of India under what parameters the VDA can be considered as located in India or having its situs in India to trigger Sec 5/ Sec 9(1)(i) of the IT Act. In other words, which place should be considered as situs of a VDA i.e. India or place of residence of the NR seller or IP address of the Seller or the Place of utilization of such VDA?

“Property” may be defined in clause (x) Sec 56(2) of the Income Tax Act, 1961:

The expression “property” may be defined in clause (x) itself, by including “virtual digital asset” as item (x) after bullion. This will ensure that virtual digital asset, which is a capital asset is included in the definition of property.

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Author: Adv. Ashish Parashar, Supreme Court of India | advashishparashar@gmail.com