TAX ON VIRTUAL DIGITAL ASSET
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In News
- The government said that infrastructure costs incurred in the mining of cryptocurrencies or any virtual digital assets will not be allowed as deduction under the Income-tax Act.
- Also, losses incurred from one kind of virtual digital assets (VDAs) cannot be set off against the gains from any transaction involving another VDA while computing tax.
What is Cryptocurrency?
- A cryptocurrency is a digital or virtual currencythat is meant to be a medium of exchange. Cryptography is a method of using encryption and decryption to secure communication in the presence of third parties with ill intent.
- It is quite similar to real-world currency, except it does not have any physical embodiment, and it uses cryptography to work.
- Because cryptocurrencies operate independently and in a decentralized manner, without a bank or a central authority, new units can be added only after certain conditions are met.
- For example, with Bitcoin, only after a block has been added to the blockchain will the miner be rewarded with bitcoins, and this is the only way new bitcoins can be generated. The limit for bitcoins is 21 million; after this, no more bitcoins will be produced.
What is Cryptocurrency Mining?
- Mining is the process of generating new coins and verifying new transactions on a blockchain, which involves a lot of processing power and computers on the network.
- To put it simply, the miners maintain and secure the blockchain. In return, they are rewarded in cryptocurrencies for the mining.
Watch this video for better understanding: https://youtu.be/2VtH-XAOjXw
Taxation
- Union Budget 2022 has proposed that the gains from the sale of virtual digital assets will attract a flat 30 per cent tax going forward. The virtual digital currency will include crypto-currencies and non-fungible tokens (NFTs).
- The loss arising from the sale of any virtual assets cannot be set off against any other income.
- A TDS of 1 per cent will be levied on payments made on transfer of the digital assets.
- If one gifts crypto-currencies or any other virtual digital asset, it will be taxed at the same rate at the hands of the recipient.
- Here, definition of virtual digital asset, is broad enough to cover emerging digital assets including NFT, assets in metaverse, digital currencies, tokens, etc. Basically, any information or code or number or token not being Indian currency or foreign currency is generated through cryptographic means.
- Infrastructure costs incurred in mining of VDA (eg. crypto assets) will not be treated as cost of acquisition as the same will be in the nature of capital expenditure which is not allowable as deduction.
Read about Crypto currencies in detail here: https://www.iasgyan.in/blogs/cryptocurrency-pros-and-cons