Budget 2022: Tax clarity emerges on digital virtual assets

Cryptocurrency (Representative image)

In Budget 2022, finance minister Nirmala Sitharaman gave clarity on how digital assets will be taxed. This means that gains from cryptocurrencies will now be taxed. At present, there are no explicit provisions dealing with taxation of cryptocurrencies under the income-tax act, 1961, given that the Cryptocurrency Bill is pending a debate in Parliament.

What are digital assets?

According to a definition in finance bill, the virtual digital asset is proposed to mean 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. Non-fungible tokens (NFTs) and any other token of similar nature are included in the definition.

The proposed tax on digital assets

In the budget speech, the finance minister has proposed that income from the transfer of any digital asset (this is likely to include cryptocurrencies and non-fungible tokens or NFTs) will be taxed at 30 percent. No expenditure of any expenditure, except cost of purchase., will be allowed. Also, losses, if any, occurred in transfer of digital assets cannot be set-off against profits. Nischal Shetty, Founder & CEO at WazirX says, “This is a positive step towards positive crypto regulations.”

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"The legal mandate on taxation of digital assets is a very welcome and motivating move for the entire digital asset industry and Web 3.0 market. The flat and higher tax rate of 30% may not be a deterrent in trading and investing at this stage (may be in the case of gifting), as this move gives government affirmation which was lacking before for better adoption of the digital assets," says Nakul Batra, Associate Partner, DSK Legal.

While the cryptocurrency lobby appears to be happy with the announcement, the Budget announcement also sends a stern message, according to some experts. Ritesh Kumar, Partner of IndusLaw has contradict views. He says, “The 30 percent rate of tax and restriction to set-off losses is a very bold move in discouraging transactions in crypto.”

Income from the transfer of virtual digital assets is brought within the scope of Indian tax laws by the newly proposed Section 115BBH. Lokesh Shah, Partner, Saraf & Partners, says, “These amendments, if approved, will come into effect from 1st April 2023 and will, apply in relation to Assessment Year 2023-2024 onwards. The provisions, therefore, are applicable prospectively in respect of income earned from the transfer of virtual digital assets on or after April 1, 2022.

Sameer Jain, Managing Partner, PSL Advocates & Solicitors says, “Tax deduction at source (TDS) of 1 percent has also been introduced to collect data on people’s trading in digital assets.”

"Introducing TDS on the crypto trade is a masterstroke by the government. Now the government doesn’t have to reprimand exchanges to give them data of crypto investors, the exchange will have to deduct and report TDS for each trade so the government knows exactly how much everyone has traded in Indian Rupees," says Naimish Sanghvi, founder of Coin Crunch India.

Ways to reduce tax burden

There are ways investors could reduce their tax burden. Abhinav Soomaney, CEO, Cryptotax says, “Most commonly used cryptocurrency tax calculation methods include highest in first out (HIFO) method and last in first out (LIFO) method.” He adds the HIFO approach is most beneficial for investors who would like to use their highest cost basis coins and apply that towards coins sold. This would reduce the taxable gain amount significantly and give some relief to investors.

The crypto investments in India have increased to over $10 billion in November 2021, from $0.9 billion in April 2020, according to Credit Rating for Exchanges Blockchains and Coin Offerings (CREBACO). This announcement will give a certain clarification to investors trading in digital assets and chartered accountants while filing their returns.