The Union Budget 2022 also proposed imposing 30% Tax on virtual assets, effectively legitimizing trading of private cryptocurrencies and non-fungible tokens.

For the taxation of virtual digital assets, the budget provides that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent. No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Further, loss from transfer of virtual digital asset cannot be set off against any other income. In order to capture the transaction details, a provision has been made for TDS on payment made in relation to transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold. Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient.

For the first time, the government has officially termed digital assets including crypto assets under “Virtual Digital Assets”. These comprise all the cryptos such as Bitcoin, Ethereum, etc, and other digital assets such as Non-fungible tokens (NFTs) by way of amendment in Section 2 of the Income-tax Act,–– (a) in clause (42C), for the word “sales” occurring at the end and before Explanation 1, the word “transfer” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2021; (b) after clause (47), the following clause shall be inserted, namely:––

‘(47A) “virtual digital asset” means––

(a) 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;

(b) a non-fungible token or any other token of similar nature, by whatever name called;

(c) 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 virtual digital asset subject to such conditions as may be specified therein.

Explanation.––For the purposes of this clause,–– (a) “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify; (b) the expressions “currency”, “foreign currency” and “Indian currency” shall have the 21 same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999.’.

The government has proposed the following specific tax regime for the industry: 

•  Income from transfer of any virtual digital asset to be taxed at the rate of 30 per cent,
• TDS of 1 percent to be charged on payments made for transfer of virtual assets, above a certain monetary threshold,
•  The gift of virtual digital assets is proposed to be taxed in the hands of the recipient.

The proposed income tax is applicable from 1st April 2022 and the TDS of 1% is applicable from 1st July 2022, to be effective from financial year FY 2022-23 onwards.

1% TDS on Crypto Assets  

The TDS of 1% has been introduced to capture the transaction details and keep a track of investments being made in crypto assets.. So, every time you purchase a crypto asset (subject to a certain threshold), you are liable to deduct 1% TDS of the transaction amount in the financial year.

The flat income tax rate is applicable to retail investors, traders, or anyone transferring crypto assets in a given financial year with no distinctions between short-term and long-term gains. 30% tax rate will be levied on any profits made from transfer of virtual assets. The tax rate will be the same irrespective of the nature of income i.e. it does not matter if it is an investment income or business income and is irrespective of the holding period.

Is Crypto legal in India now?

During a post-budget press conference, the Finance minister said consultation is underway on crypto regulation and what is legal, what is not will be clear once the regulatory document is finalised.

How will taxes work with digital assets?

All types of profits made from a digital asset transaction are taxed at 30%, irrespective of your income tax slab and period of holding. 

For Example: If an investment of INR 2,00,000 was made in crypto at the beginning of FY2022, and by the end of FY2022, the crypto was sold for INR 3,00,000, a flat 30% tax rate is applicable on income gain of INR 1,00,000. As an investor, you will be liable to pay INR 30,000 (plus surcharge and cess) as tax on crypto income in that financial year.

It should be noted that any income arising on transactions relating to crypto shall be taxed only at the time of transfer of such crypto i.e. if a person continues to hold the asset, the holding is not taxable on such unrealized gains.

Are there taxes on virtual digital assets?

Yes, you will have to pay taxes at the rate of 30% on virtual digital assets when you sell them for profit and transfer the amount to the bank account. Also, any payment transfer made related to digital assets transactions will be applicable for a TDS of 1%.

Can you avoid paying tax on crypto?

The tax regime declared by the  Indian Government on digital assets are comprehensive and it would be illegal to evade taxes.

I have been investing in virtual digital assets for a long period. Will my previous gains also be taxed and how?

Yes, the previous gains will also be taxed if the same are released on or after April 1, 2022. For example, if you sell your current holdings on or before March 31, 2022, the current system of taxation will apply on your gains. However, if you sell them on or after April 1, 2022, you will be subjected to a tax at 30% on gains arising from such transfers.  

Will long-term and short-term capital gains apply to virtual digital assets? 

No, there is no characterization difference of long-term and short-term in virtual digital assets. Every transaction regardless of the period of holding will be subject to income tax at a flat rate of 30%.