Introduction
Digitalisation means the transition from analogue to digital methods of recording and transmitting information in the human-digital environment. In the contemporary era of accelerated digitalisation, the global economy is experiencing profound transformations driven by advancements in information technology. One of the key phenomena in this process is the rapid creation of virtual assets. Virtual assets have become an integral part of the modern digital economy. Their development and proliferation create new opportunities and challenges for economic and legal systems.
What is VDA?
In general terms, a virtual digital asset is a digital holding encrypted on blockchain technology that allows an individual to verify the authenticity and ownership. Created and stored digitally, VDAs represent identifiable value and can be digitally traded, transferred, or used for payment. Virtual assets, including cryptocurrencies, tokens and other digital forms of value, have become an integral part of modern financial markets, attracting significant interest from investors and regulators alike.
Regulatory Framework
While VDAs are reshaping the financial landscape, their extreme price fluctuations, speculative nature, and lack of regulatory clarity raise critical questions about their role in financial systems and individual wealth management. As the popularity and use of these assets continue to grow globally, countries have agreed and responded by creating regulatory frameworks and tax policies to govern their use and ensure compliance.
The economic and legal aspects of virtual assets require in-depth research in order to develop effective regulatory mechanisms and ensure the stable development of financial markets. there are certain grey areas that need to be reconsidered for a better VDS atmosphere in the nation. On one hand, the government came out with a prudent way to enforce a tax on one of the most budding spaces but on the other hand, there are still no legislative guidelines or regulations that will govern and provide clarity to this area.
From India’s perspectives
The Securities and Exchange Board of India Act, 1992 (SEBI Act), primarily governs the regulation of securities markets in India, granting the Securities and Exchange Board of India (SEBI) the authority to oversee market intermediaries, prevent market manipulation and protect investors. The SEBI Act does not explicitly address cryptocurrencies or VDAs, as they fall outside the traditional framework of ‘securities’. VDAs with their decentralized and digital nature do not neatly align with the definition of ‘securities’ under the SEBI Act, which is focused on traditional financial instruments like stocks, debentures, bonds or derivatives.
Income Tax authorities in India have established a stringent framework for taxing Virtual Digital Assets (VDAs), including cryptocurrencies and NFTs, which was first introduced in the Union Budget 2022 and has seen enhanced enforcement measures since. This framework aims to formalize the VDA market and increase compliance. At present, VDAs are subject to a flat 30% tax rate, plus any applicable surcharge and a 4% cess. A 1% TDS is applicable on the value of each VDA transfer if the transaction amount exceeds ₹50,000 in a financial year for specified individuals or ₹10,000 for others. Losses from the transfer of VDAs cannot be set off against any other income. In India, gifts of digital assets like cryptocurrency and NFTs are taxable in the hands of the recipient, with some key exemptions. If the total fair market value of all digital asset gifts received from non-relatives in a financial year is more than ₹50,000, the entire amount is taxed. The recipient must add this amount to their “Income from Other Sources” and pay tax according to their regular income tax slab rate.
VDA investment among Generation Z is more prominent than in older generations, but it is unlikely to become the sole or primary component of their portfolios. Gen Z investors in India are tech-savvy and actively exploring new asset classes, including VDAs. However, studies suggest they are also pragmatic, balancing risk with traditional, long-term investments like mutual funds. VDAs are heavily promoted on social media by “finfluencers,” which influences Gen Z investment decisions. For prospective investors, Virtual Digital Assets (VDAs) present both high-risk and high-reward opportunities, particularly within India’s strict tax and evolving regulatory environment. It is crucial to proceed with caution and a well-informed strategy, as volatility, security issues, and an unfavorable tax structure can heavily impact returns.