As the festive season of Deepavali approaches, many individuals are considering unique and modern gifts, such as NFTs (Non-Fungible Tokens), cryptocurrencies, and Virtual Digital Assets (VDAs). However, it’s crucial to be aware of the tax implications associated with gifting these virtual assets, particularly in the context of the recent changes in India’s Income-tax Act.

Expanding the Definition of ‘Property’

In the Budget 2022 proposal, the definition of ‘property’ under the Income-tax Act in India was expanded to include virtual digital assets for the taxation of gifts. These virtual digital assets, considered movable properties, bring about a new dimension to the taxation landscape.

Taxation of Gifts

When gifting a virtual digital asset without consideration or for inadequate consideration, and its value exceeds Rs. 50,000, it becomes taxable in the hands of the recipient under Section 56(2)(x) of the Income Tax Act, 1961, as income from other sources. The taxable value is determined by the difference between any amount paid by the recipient (if any) and the fair market value of the virtual digital assets.

Determining Fair Market Value

If the virtual digital assets are purchased from a registered dealer, the invoice value serves as the fair market value. However, if acquired through other means like mining, the fair market value should be estimated based on the open market price on the valuation date, subject to specific conditions.

Exemptions for Specified Relatives and Occasions

It’s important to note that gifts to specified relatives or on specific occasions are exempt from tax, regardless of the gift’s amount. This exemption applies to gifts from parents, siblings, marriage, wills, inheritance, and contemplation of the death of the donor.

Recipient’s Tax Liability on Sale or Trade

For recipients of digital gifts, the tax implications extend to the sale or trading of these assets. Crypto Gains tax applies, with the taxable amount being the sale value minus the cost of acquisition (Fair Market Value offered for tax under income from other sources). The tax rate is set at 30%, and these gains should be reported under Schedule VDA in the Income Tax Return (ITR).

Responsible Giving to Mitigate Tax Obligations

To avoid burdening the recipient with unexpected tax obligations, responsible giving is crucial. Consider gifting among immediate relatives to ensure a tax-free celebration. Additionally, do stay informed about recent changes in tax laws, such as the disallowance of set-off and carry forward for losses from virtual digital assets.

Conclusion

As the landscape of virtual assets continues to evolve, understanding the tax implications of gifting NFTs, cryptocurrencies, and VDAs becomes increasingly important. By navigating these regulations effectively, individuals can engage in responsible giving and ensure a joyous and tax-efficient Deepavali celebration.