Budget 2022 levies crypto tax. How it will impact investors

Finance Minister Nirmala Sitharaman’s Budget announcement on taxing virtual assets created a buzz, as it is the first clear sign of how the government plans to go ahead with this popular asset class. But certain aspects still remain unclear.

Moneycontrol spoke to experts to find out what the taxing of “virtual assets” means for the larger industry.

What is a virtual asset? 

"Virtual assets" means any information or code or number or token (not being Indian currency or any foreign currency) generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically.

It also includes non-fungible tokens (NFTs) and any other tokens of similar nature.

Is crypto now legal?

“Though the government has recognised that crypto transactions are increasing in number and there is a need to tax the gains from crypto trading, it does not imply that cryptocurrencies are now legal. The Supreme Court in various verdicts has upheld that income from even unlawful or illegal sources must be taxed,” said Rashmi Deshpande, Partner at law firm Khaitan and Co.

Experts say that while gains from cryptocurrencies will be taxed, the details on its legalities, classification of various cryptos and regulation will only be disclosed in the impending crypto bill.

Also read: Budget 2022 at a glance – your definitive, quick guide to one and a half hours of FM speech

The long-pending crypto bill was to offer much-needed clarity on cryptocurrency’s legal status in India. 

“The recognition that is accorded to crypto today, by means of a proposed amendment to the Income Tax Act should actually not be used to infer anything further,” according to Ritesh Kumar, Partner at Indus Law.

However, a proper definition of cryptocurrencies and amendments to the Income Tax Act further reaffirm that the government would regulate cryptocurrencies, experts said.

Also read: Budget 2022| FM Niramala Sitharaman blends welfare needs with reformist intent

“It does suggest that the government will not ban cryptocurrencies but a 30 percent tax and TDS on top of that may mean that the government will probably bring in stringent regulations,” said Rashmi Deshpande, Partner at law firm Khaitan and Co.

The good news for crypto is that it was finally acknowledged in the budget. That doesn't mean it's legal—it will only be after the crypto bill.

Until then, regulated entities in India can't offer trading in crypto. Here's my reading of crypto post the budget 1/5

— Nithin Kamath (@Nithin0dha) February 1, 2022

How will taxation work?

In the Budget memorandum, the government has detailed that a 30 percent flat tax will be applicable to income from virtual digital assets. Unlike gains from equities held for a certain period, gains from crypto trades will not attract different tax slabs based on how long they are held. This will be applicable starting April 1, 2023 and the taxes will be levied from the assessment year FY24.

Also read: Budget 2022 | FM pegs fiscal deficit at 6.4% of GDP for FY23

The memorandum said gains from each asset would be separately taxable and even if in the same year there is a loss on the transfer of digital assets, it cannot be set off.

Nischal Shetty, founder of crypto trading firm WazirX also explained in a tweet

Just giving a quick example. It’s not to be taken as tax advise or anything

You make profit of Rs. 100 in one crypto trade

You make loss of Rs. 100 in another crypto trade

These were the only two trades done in the financial year

Your tax on crypto profit would be 0 https://t.co/HKbLWxkPUq

— Nischal (WazirX) ️ (@NischalShetty) February 1, 2022

Why 1% TDS, and its impact 

The Finance Minister said 1 percent TDS was being implemented to track crypto transactions so that the government won’t have to depend on cryptoexchanges to collect data of each transaction and the volume.

Despite the high tax, the industry sees this as a positive sign, drawing comfort from the fact that cryptocurrencies would not be banned and instead would be regulated.

"As of now, we don't see much panic but investors have a mixed response to the announcement. But going forward, maybe we will see an impact on trading volumes if people see more value in buying and holding for longer term. We may see people holding on to their investments rather than selling because selling will attract taxes," said crypto investor and founder of BitInning Kashif Raza.