1. Introduction

Digital assets have emerged as a significant component of the financial ecosystem globally and in India. With the rise of blockchain technology, cryptocurrencies, NFTs, and other virtual digital assets (VDAs), businesses and individuals are increasingly involved in transactions involving digital assets. As such, proper accounting and disclosure in line with Indian regulations and standards are vital for transparency, compliance, and informed decision-making.

2. Understanding Digital Assets

A digital asset is any item of value that exists in digital form and comes with distinct usage rights or ownership. Common examples include:

• Cryptocurrencies (Bitcoin, Ethereum, etc.)

• Non-Fungible Tokens (NFTs)

• Stablecoins

• Digital Wallet Balances

• Tokens used in decentralized finance (DeFi)

These assets are typically secured using cryptography and maintained on blockchain or distributed ledger technologies.

3. Types of Digital Assets

a. Fungible Tokens: Interchangeable and identical in value, such as Bitcoin.

b. Non-Fungible Tokens (NFTs): Unique digital representations of assets like art, music, or videos.

c. Stablecoins: Pegged to fiat currency to reduce volatility.

d. Utility Tokens: Provide access to a specific product or service.

e. Security Tokens: Represent ownership in real-world assets or company shares.

4. Regulatory Landscape in India

In India, digital assets are governed under a mix of regulations including:

• Income Tax Act (with specific provisions for VDAs from FY 2022–23)

• FEMA (Foreign Exchange Management Act)

• Companies Act, 2013

• SEBI regulations for security tokens

• RBI circulars on cryptocurrencies

While RBI does not consider crypto legal tender, transactions in VDAs are taxable and must be reported.

5. Accounting Standards Applicable to Digital Assets

Currently, India does not have a specific accounting standard for digital assets. However, indirect guidance can be taken from:

• Ind AS 38 (Intangible Assets)

• Ind AS 2 (Inventories)

• Ind AS 109 (Financial Instruments)

The choice depends on the entity's business model and the nature of the asset.

6. Recognition and Measurement

Initial Recognition:

• At the cost of acquisition, including directly attributable costs like transaction fees.

Subsequent Measurement:

• Cost model or revaluation model (based on classification).

• Gains and losses from revaluation or disposal must be appropriately recorded.

7. Classification of Digital Assets in Books of Accounts

a. Inventory: If held for sale in the ordinary course of business (e.g., crypto trading).

b. Intangible Asset: If held for investment purposes or not actively traded.

c. Financial Asset: In certain cases, such as tokenized debt instruments.

8. Valuation of Digital Assets

Valuation can be complex due to volatility and lack of standard benchmarks. Methods include:

• Market price on active exchanges

• Appraisal by valuation experts

• Cost approach for NFTs

Mark-to-market valuation may be required for fair representation.

9. Tax Implications

Budget 2022 introduced taxation for VDAs:

• Flat 30% tax on income from transfer of VDAs

• No deduction except cost of acquisition

• 1% TDS on VDA transactions (Sec 194S)

GST Applicability:

• Subject to classification. Supply of goods/services via blockchain may attract GST.

Disclosures in ITR and tax audits are also mandatory.

10. Audit and Disclosure Requirements

• Disclosures under Schedule III of the Companies Act

• Reporting of digital asset transactions in tax audit reports

• Internal audit procedures to verify ownership, valuation, and risk management

Auditors must ensure the proper classification, fair valuation, and compliance with applicable laws.

11. Challenges in Accounting for Digital Assets

• Lack of Standard Guidelines

• High Volatility in Valuation

• Complexity in Classifying NFTs and Tokens

• Cross-border Regulatory Uncertainty

• Cybersecurity Risks

• Difficulty in Auditing Wallet Ownership and Private Keys

12. Best Practices for Digital Asset Accounting

• Maintain detailed ledgers for each digital asset

• Use specialized accounting software for blockchain-based assets

• Perform regular reconciliations

• Implement robust internal controls and wallet security

• Consult tax and legal professionals

13. Case Study: Digital Asset Reporting in a Tech Startup

Company: XYZ Blockchain Pvt. Ltd.
Business: Crypto wallet and exchange platform

Accounting Practice:

• Classifies held tokens as Inventory under Ind AS 2

• Uses market-based valuation

• Performs monthly revaluation

• Discloses VDA holdings in financial statements

Challenges:

• TDS reconciliation under Sec 194S

• Matching wallet balances with blockchain explorer

14. Flow Chart: Digital Asset Accounting Process

Start
  └── Identify Nature of Digital Asset
          └── Classify (Inventory / Intangible / Financial Asset)
                  └── Initial Recognition at Cost
                          └── Determine Measurement Model (Cost / Revaluation)
                                  └── Record in Books of Accounts
                                          └── Disclose in Financial Statements
                                                  └── Ensure Tax and Audit Compliance
                                                          └── End

15. Conclusion

Digital asset accounting in India is evolving and complex. With the government's increasing focus on regulating virtual digital assets, businesses must stay ahead by implementing robust accounting systems, understanding legal frameworks, and ensuring transparency in financial reporting. The integration of digital asset accounting into mainstream practices is not only inevitable but crucial for the credibility and sustainability of businesses in the digital economy.

Created & Posted by Aradhana Singh

CA Intern at TAXAJ

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