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VDA Taxation & Classification Overview of Crypto Assets in India!

Tracking the crypto market may be easier using some platforms, but tracking Digital Assets is becoming increasingly difficult. Parallelly, recognizing various electronic assets with their Taxation variances is equally puzzling. Hence, several countries have enacted their own VDA Taxation & Classification laws.

But before finding the parameters that differentiate the various taxation slabs, it’s vital to understand the difference between the types of virtual assets. To do so, it’s first critical to learn what VDA is, especially for crypto investors and businesses running crypto projects.

VDA Taxation

What is VDA?

The linear definition of VDA stands for Virtual Digital Assets, it encompasses any asset that may not be real or physical in nature.

While this definition stands true for most types of crypto assets existing on the blockchain, it’s not limited to them. Each nation could have a different set of parameters that define what constitutes a VDA in its financial legislation.

VDA Taxation

Hence, the Meaning of VDA differs from country to country, wherein some may not even consider them as a financial instrument or otherwise. In such conditions, it’s difficult to derive the standards of VDA Taxation. 

Thus, the foremost questions that arise are what is included in the definition of VDA & are all electronic assets VDA?

Are All the Electronic Assets VDA?

The VDA Classification isn’t simple but it’s not too complex, depending on how the legislation of a nation recognizes them. For instance, the Indian Financial Legislation maintains the above linear VDA definition to be true, as long as recognizing them is concerned.

On the other hand, those assets are vastly diverse in terms of whether they can be legally managed or not. It also determines whether they are taxed or seen as illicit to own, trade, or exchange. So, let’s look into the clauses that define it in detail.

VDA Taxation & Classification: How do VDA Differ from One Another?

As per the [Section 2 (Clause 47A)], the VDA is exclusively defined sans classified as follows by the Central Government:

  • Any information, number, code, or token (not being an Indian or Foreign currency), generated using cryptography or otherwise, known by whichever name, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having integral or implicit value, or functioning as a store of value or unit of account, inclusive of its use towards or against any financial investment or transaction, but not limited to investment-scheme; and can be transferred, traded or stored electronically;
  • Non-Fungible Token (NFT) or any other form of token sharing similar nature, recognized by whichever name;
  • Any other digital asset, as the Central Government may specify, as per the Official Gazette.

Note: The definition stated above is purely for reference purposes and may not be exact. At the same time, the representation is relatively closer to the actual meaning. Concerned readers are requested to look up the actual [Section 2 (Clause 47A)] for better understanding.

Also Read: What is Crypto Fork? Hard Fork & Soft Fork Explained!

The above definition of the VDA Classification includes recognizing cryptocurrencies, NFTs, and other electronic assets only as per the Central Government notice. Therefore, it leaves out other electronic assets such as subscriptions to OTT platforms, e-commerce platforms, mobile applications, other digital subscriptions, etc.

Simultaneously, the Central Government retains the right and the power to exclude its native and First Digital Currency or the Central Bank Digital Currency (CDBC).

Known & Recognized Types of Virtual Digital Assets in India

The VDA Classification as per the Official Gazette recognized the following types of assets as legal or taxable.

1. Cryptocurrencies

All types of tokens native to blockchain networks including the DeFi tokens, ERC20 tokens, Altcoins, and Metaverse Tokens, are recognized as crypto tokens.

The classification also subsets the inclusion of any type of electronic token that could be purchased using fiat currency. The VDA Taxation for cryptos declares paying a flat 30% Capital Gains tax on them plus cess plus surcharge.

2. NFTs

All types of crypto Non-Fungible assets or Virtual Digital Assets of similar nature are classified as crypto tokens. They are taxed equally on Capital Gains and ownership as the crypto tokens at a flat 30% plus cess plus surcharge.

The taxation rate was declared with the Union Budget on 1st February 2022 and made effective from 1st April 2022.

NFT marketplaces startups

Partial or Non-Recognized Types of Virtual Digital Assets in India

The Central Government is yet to make crypto trading, exchange, staking, or mining legal in India besides diversifying it broadly. Simultaneously, enacting separate laws for different types of crypto ownership or exchanges is yet another whistle in the dark.

Hence, the Central Government Taxation norms treat the below-mentioned types of digital assets or cryptos similarly as above. All of the various types of Crypto or Digital Assets listed below are subjected to carrying 30% Capital Gains tax plus cess plus surcharge.

1. Crypto ETFs

As per the globally recognized or believed standards of VDA Classification, the Crypto Exchange Traded Funds (Crypto ETFs) track an index or a basket of assets. The registered users can invest in these prices or the assets using fiat currency without having to own them in actuality.

No such platforms exist or are registered with the Securities and Exchange Board of India as of now. However, Indian native investors earning any Capital Gains or losses from ETFs will have to pay the aforementioned percentage of taxes on using them.

2. ERC1155 Tokens

Assets linked to the newer token standard ERC1155 are also classified as VDA as per the Central Government Gazette definition. However, such assets are yet to be further classified because the token standard allows nesting multiple crypto tokens into one.

Take for example, if an investor purchases an ERC1155 token having both ERC20 tokens and ERC721 tokens (NFTs), then paying only a 30% tax on it seems like a bargain. Likewise, the framework to classify or regulate the trade or purchase of such tokens is yet to be well-defined.

3. Crypto Utility Tokens

As per the global VDA Classification, the utility tokens serve multiple purposes while being interchangeable within the same blockchain. For example, the Enjin coins available on the Enjin platform on the Ethereum blockchain could be exchanged for ETH cryptocurrency.

Herein, such tokens also carry the same rate of taxation and other charges similar to any other crypto token. While it seems feasible to see them as crypto tokens, as per the Indian Central Government, its native distinction of not merely being the ERC20 token should be recognized differently.

VDA Taxation

4. Blockchain Governance Tokens

The Governance tokens differ from utility tokens in more than one way. While representing a non-fungible value allowing the owner to vote on blockchain decisions, such tokens could still be traded like ERC20 tokens.

Again, defining a separate classification for such tokens is yet to be determined, which should be done readily. It will solve a major issue, i.e., influence investors to acquire more or trade them more.

Either way, having a separate set of VDA taxation norms within the [Section 2 (Clause 47A)] will offer better clarity to investors besides building potential for trading them more on the crypto market.

5. Other Virtual Digital Assets

Besides the governance, utility, non-fungible, and other forms of tokens, all other cryptos like Altcoins are also recognized as VDAs. Such a declaration creates a vast grey area that can become grounds for illicit activities like money laundering, and so on.

Take for example the Altcoins, while users will pay the declared sum against its trade or ownership, should it be more rewarding to acquire or sell, the investor benefits greatly. In the opposite scenario, the high crypto taxation rate can be detrimental and deter investors from choosing such assets.

When Will VDA Taxation & Classification be Amended?

VDAs can differ from another based on their mode of creation, their representation of value, and their utility. Several other factors pertaining to their existence are also taken into account, but the Central Government currently only recognizes two types mentioned above as of now.

VDA Taxation

Presently, it’s unclear when the Central Government will divulge details regarding further differentiation but they’re looking into it actively. Investors can currently only wait on fresh announcements regarding crypto regulations to better scope out their investment possibilities in the future.

Until then, the rules are defined, with respect to disallowing the purchase of crypto assets using banking options like IMPS, UPI, etc.

Stopping the use of such payment channels was announced only earlier in April, prior to which, platforms like WazirX and others did have the authority to offer them to their registered users.

Final Words

The need for proper, and comprehensively broader VDA Classification is paramount for the Indian Government and other nations to curb or accelerate the crypto adoption. Since the CBDC distribution will expectantly be announced by the end of 2023, it’s unlikely that the VDA Taxation will change significantly or at all until then.

FAQs

What is VDA?


The linear definition of VDA means Virtual Digital Assets, inclusive of assets that are not physical or real in nature. It presently covers most types of crypto assets like the ERC20 & ERC1155 tokens, NFTs, and so on.

Are all Virtual Digital Assets taxed similarly?


Presently, the VDA Taxation as per the Central Government Official Gazette is largely similar for the specified categories. All cryptos or VDA are taxed at 30% against gains or losses, with a 1% TDS charge.

Who defines what is VDA?


Defining what VDA is governed by the Central Government and the Finance Minister of the respective country. They jointly retain the power to abolish or promote its provisions, which can bring a significant shift in the global crypto trade volume.

Is the ownership or transfer or exchange of VDA taxable?


Certain countries do not count the VDA as private assets or a mode of payment against goods and services, hence they might or may not levy taxes on it. However, the Indian Central Government has declared that the activity of ownership or transfer of VDA is taxable from April 1st, 2022.

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