After a long discussion on the legalization and regulation of cryptocurrencies in India, Budget 2022 announced the taxation aspect of the cryptocurrency (rather virtual digital assets as announced in the Budget). Taxation of Virtual Digital Assets (Cryptocurrency) seems to be a stepping stone towards the regularization and legalization of all the cryptocurrencies in India. Our Finance Minister Mrs. Nirmala Sitaraman announced a number of aspects pertaining to cryptocurrency taxation, however, much clarification is still awaited on the subject.
Taxation Aspects of Cryptocurrency in India As per Budget 2022
The main highlights of Virtual Digital Assets’ (Cryptocurrency) taxation as per Budget 2022 is as under:
What are Virtual digital assets?
As per Budget 2022, Clause 47A has been introduced under section 2 of the Act which defines Virtual Digital Assets.
As per clause (47A) “virtual digital asset” means:
Any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value 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 including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
A non-fungible token or any other token of similar nature, by whatever name called;
Any other digital asset, as the Central Government may, by notification in the Official Gazette specify:
Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of the virtual digital asset subject to such conditions as may be specified therein.
Explanation–For the purposes of this clause–
“non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
The expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m), and (q) of section 2 of the Foreign Exchange Management Act, 1999.’.
The Budget 2022 has proposed the following taxation scheme for the Virtual Digital Assets:
30% Taxation on Cryptocurrencies: All the gain/income from Virtual Assets (Cryptocurrency) trading shall be taxed at the rate of 30%. This rate will be regardless of the tax slab of a person. Thus, if you are falling in a tax-free income slab or 20% or 30% tax bracket, you need to pay tax at a flat rate of 30%.
Introduction of Section 115 BBH: The Finance Bill has proposed section 115BBH for the taxation of income from virtual digital assets.
No Set-off benefit on Losses of Cryptocurrencies: You can not set off the losses arising out of Virtual Digital Assets (cryptocurrency) trading against any gain from any source.
No Carry forward of Cryptocurrencies’ losses: You can not carry forward the losses arising out of Virtual Digital Assets (cryptocurrency) trading to the future.
No Indexation Benefit on Cryptocurrencies’ gain: Indexation benefits will not be available on the gains of Virtual Assets.
Taxation on Gift of Cryptocurrencies: If you are gifting the Virtual Asset, it will be taxed in the hand of the recipient.
Introduction of Section 56: This section is introduced for taxation on the gift of virtual digital assets and to be offered for tax (by the receiver of the gift) under the head ‘Income from other sources.
TDS on Cryptocurrency’s Transaction: There will be TDS at the rate of 1% on Virtual Assets (Cryptocurrencies) transactions. This will help to capture the transaction details and may be reflected in 26AS and AIS, and thus, one can not evade the tax.
Introduction of Section 194S: In respect of any person (purchaser) responsible for paying any sum as consideration (in cash or kind) for the transfer of a virtual digital asset will have to deduct 1% tax and deposit this tax amount with the Government (subject to conditions).
No deduction for Expenditure: There will not be any deduction of expenditure allowed while calculating the gain on Cryptocurrency for taxation purposes and the only cost of acquisition will be allowed as a deduction from the sale proceeds of cryptocurrency.
As per the estimates available, there are around 18 million cryptocurrency investors in India who are holding close to Rs. 40,000 crore ($5.29 billion) worth of cryptocurrencies. The Budget 2022 taxation rule on Digital Assets will formalize this huge investment base in India’s virtual currency market.
Besides the above announcement, the Finance Minister also announced the launch of a Rupee Digital Currency on Blockchain technology, which will be managed by RBI. Earlier, the RBI had shown serious concerns for rapidly increasing cryptocurrencies transactions and ownerships in India on the grounds that these may cause financial instability.
