Summary of chapter 4 (VDA)
Report of the Committee on Virtual Digital Assets (VDAs)
1. Overview: Emerging Complexity in VDA Enforcement
Chapter 4 highlights the increasing complexities in handling VDAs due to their borderless, decentralized, and highly technical nature. The absence of clear statutory provisions tailored to VDAs, coupled with their extreme volatility and pseudonymous ownership, makes detection and seizure uniquely difficult. The digital form of VDAs means they can be stored in various formats—cloud storage, mobile apps, hardware wallets, or even paper wallets—necessitating both legal reform and technical acumen. Officers must navigate uncertainties in jurisdiction, privacy, encryption, and volatility while ensuring legal compliance. These challenges are not only procedural but also conceptual, requiring a rethinking of “property” and “ownership” in tax jurisprudence. The chapter outlines critical pain points across detection, access, valuation, and legal admissibility of VDAs, thereby calling for systemic intervention. In effect, the Committee frames these issues as both enforcement bottlenecks and policy vacuums that need to be addressed with urgency and institutional clarity.
2. Detection of VDAs: Invisibility by Design
2.1 Lack of Visibility in Books and Returns
VDAs often do not appear in regular accounting books or income returns. Since they are typically purchased via unregulated exchanges, peer-to-peer platforms, or as compensation in crypto projects, many taxpayers omit them from formal disclosures. This invisibility in financial records poses a major hurdle for tax detection during search and assessment.
2.2 Challenges in Identifying Wallets and Devices
Even during searches, VDAs are difficult to trace unless specific devices or paper wallets are found. Hardware wallets may be indistinguishable from USB drives and seed phrases can be written in hidden locations. Furthermore, wallets can be encrypted or deleted remotely, making real-time extraction critical. Unless officers are technically trained, such assets may remain undetected entirely.
3. Access Limitations and Voluntary Disclosure
3.1 Dependence on Passwords and Seed Phrases
The primary access route to a VDA is through its seed phrase or private key. These are often stored in memory or concealed and, without the owner’s cooperation, are nearly impossible to retrieve. Technological constraints prevent brute-forcing or circumventing encrypted access.
3.2 Consequences of Non-Cooperation
If an assessee refuses to share credentials, the assets cannot be seized despite being identified. This makes seizure enforcement heavily reliant on voluntary compliance, unlike physical assets which can be seized forcibly. In such cases, the only recourse is to apply restraint under Section 132(3) and await further proceedings, which may not guarantee success.
4. Decentralization and Cross-Border Dynamics
4.1 Exchanges Outside Indian Jurisdiction
VDAs are often held in wallets on international exchanges such as Binance, Kraken, or KuCoin, which are beyond Indian jurisdiction. Even if credentials are acquired, executing restraint or seizure through legal channels is challenging due to jurisdictional limitations and lack of cooperation treaties.
4.2 Peer-to-Peer and Anonymous Transfers
VDAs can be transferred instantly across wallets without intermediaries. These peer-to-peer transfers are pseudonymous and traceable only through sophisticated blockchain analysis. By the time enforcement action is initiated, assets could be transferred, mixed, or converted to privacy coins, making recovery difficult.
5. Valuation Issues of VDAs
5.1 Price Volatility and Lack of Uniform Standards
The highly volatile nature of cryptocurrencies means that their value fluctuates significantly over short periods. This creates complications in valuation for both seizure and assessment purposes. There is no universally accepted method for determining “fair market value,” especially for less liquid tokens or NFTs.
5.2 Absence of Qualified Valuers
Currently, no government-recognized valuers specialize in digital assets. Officers rely on spot prices from crypto exchanges, but this lacks statutory support. Moreover, illiquid or airdropped tokens have no reference price, adding to the uncertainty. The absence of a framework leads to inconsistent valuation across cases.
6. Legal Ambiguity in Seizure and Custody
6.1 Non-Recognition of VDAs under Explicit Law
While VDAs can be interpreted as “other valuable articles” under Section 132(1)(iii), this interpretation has not been tested adequately in courts. Unlike cash or gold, there is no explicit legal provision for seizure, valuation, or liquidation of VDAs in the Income Tax Act or Rules.
6.2 Enforcement of Restraint Orders
In many cases, restraint orders under Section 132(3) may be applied, but their enforceability on digital assets, particularly those on decentralized platforms, remains questionable. The law is currently better suited to tangible or demat assets, and VDAs fall in a grey zone of legal enforceability.
7. Admissibility of Digital Evidence
7.1 Evidentiary Challenges under Indian Law
Any data extracted from seized devices must meet the standards of admissibility under the Indian Evidence Act. Screenshots, logs, or transaction hashes may not be sufficient unless accompanied by digital certificates or chain-of-custody records. There is also ambiguity over the evidentiary value of public blockchain data.
7.2 Preservation and Hash Verification
Without proper hash documentation, extracted data could be questioned for tampering. Officers must ensure the use of forensically sound tools, hash fingerprinting, and time-stamped panchnamas to withstand scrutiny during assessment or appeal. Lack of such documentation may render valuable evidence invalid.
8. Concluding Insights and Recommendations
Chapter 4 concludes by reiterating that challenges in VDA detection, seizure, and valuation are rooted in the decentralized, pseudonymous, and cross-jurisdictional nature of these assets. The Committee recommends legal amendments to specifically recognize VDAs within seizure provisions, development of valuation guidelines, and immediate investment in blockchain analytics tools. Further, a robust policy response is required to bridge the procedural gaps between traditional enforcement and modern digital asset ecosystems. Without institutional strengthening and statutory clarity, enforcement efforts may remain ineffective or unenforceable in judicial forums, thereby weakening the overall integrity of tax administration.