Explained: How cryptocurrencies will be taxed after Budget 2022

In her Budget 2022 speech, finance minister Nirmala Sitharaman said the transfer of virtual digital assets would attract a 30 percent tax. This, by all means, refers to cryptocurrencies, even though India’s Cryptocurrency Bill has not been tabled or discussed in Parliament. For those who have been investing in cryptocurrencies, this may have come as a breather because the general feeling is that at least it won’t be banned now.

Here's a breakdown of some aspects related to the transaction and taxation of virtual digital assets.

Is Bitcoin a virtual digital asset?

To be sure, nowhere in her budget speech or in the budget documents has the word ‘cryptocurrency’ been mentioned. Instead, the budget spoke of ‘virtual digital assets’ and defined them as “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.”

This definition, specifically, includes non-fungible tokens (NFTs).

When does the new tax become applicable?

The new cryptocurrency – or virtual digital asset – tax comes into force on April 1, 2022.

There are other clauses under the newly proposed Section 115 BBH, including one that states losses cannot be adjusted against other sources of income.

“No deductions or exemptions allowed,” said Rishi Anand, a partner at DSK Legal. “However, more clarity is to come on deductions on cost of acquisition of digital assets and on setting-off losses from trade in other digital assets in a given financial year.”

Also, all transfers of such assets will attract 1 percent tax deducted at source (TDS). Even gifting will attract the 30 percent tax.

A detailed set of guidelines can be expected soon after the budget is passed in Parliament.

What is the difference between ‘transfer’ of virtual assets and their ‘sale?’

Cryptocurrencies exchange hands in more than one way. Unlike a normal buy-sell of equity shares, mutual fund units and other such regulated assets, cryptocurrencies are not strictly bought and sold on exchanges. Many times, two people exchange cryptocurrencies through their wallets. Lokesh Shah, Partner, Saraf & Partners said that “transfer is a wide term and includes exchange as well. You own a Bitcoin and I own an Ethereum and we exchange our coins. This is covered within the definition of transfer for tax purposes. Hence, he says, the government uses the term ‘transfer’ to encompass all sort of transactions.

A sale of crypto coin, on the other hand, involves normal cash or currency. The Budget proposals aim to tax both types of transactions.

Also read | Millennials and cryptocurrencies: A story of missed profits, hard lessons and losses

Will I be taxed if I simply transfer my coins between my own wallets?

No, it should not be taxed. But we need to get more clarity with respect to what they mean by “Transfer”.  Rishabh Parakh, a chartered accountant and founder of NRP Capitals said that transfer between your own wallets is not a sell and it is akin to transferring money from our own bank account to bank account. A transfer of coins from the crypto exchange to your own wallet also should not be taxed, if it’s your own investment and you are the account holder of the wallet unless you transfer it to a third party.

What happens if I gift cryptocurrency to my family?

Yes, gifts of virtual digital asset will now be taxable in the hands of the recipient. “Gifting to your close relative which includes wife or children, is not liable to tax. However, gifting to third parties or persons not covered within the definition of relatives, will be liable to tax,” said Shah.

If 30 percent tax (plus surcharge) is payable, what’s the need for 1 percent TDS?

The government introduced TDS of 1 percent because it wants to keep tabs on who buys and sells virtual assets like NFTs and cryptocurrencies. The tax at source will be deducted by the crypto exchanges and passed on to the government.

There are no set-offs allowed. What does this mean for crypto investors?

In what some experts have termed harsh, Sitharaman said no set-offs will be allowed on losses incurred in the transfer of virtual assets. This means losses or profits of crypto cannot be adjusted with any other income or losses in the current financial year and losses cannot be carried forward to the next year. The set-off clause is typically available in other assets.

“This would mean that if the crypto market (which is very volatile) crashes on March 31, you have no time to recover your losses and you will have to bear the losses in the current year,” said Sidharth Sogani, CEO of CREBACO Global.

However, Naimish Sanghvi, founder of Coin Crunch India, said the government should clarify if the loss arising from a transfer of virtual assets can be set off against gains made in other virtual assets.

The first impression of most experts following digital assets is that the new tax regime is punitive in nature.

“Not allowing any deduction or set-off against losses to calculate tax on crypto gain is not in line with the tax regimes around,” said Sameer Jain, managing partner at PSL Advocates & Solicitors. “Trading in crypto has been, in essence, declared as an isolated transaction for an individual, which will be taxed, irrespective of the overall losses.”

The only deduction allowed is the cost of acquisition. For instance, if you have invested Rs 1 lakh in crypto and sold for Rs 1.5 lakh, then only the gain of Rs 50,000 will be taxed without any other deduction.

“Most of the population does not pay tax because either they are under the tax-free income slab or in lower tax-paying slabs. In this situation, the 30 percent flat tax percentage is not justified,” said Sogani.

Virtual assets are now taxed so highly that only the rich can afford to invest in crypto, he said.