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Budget 2022 – Taxation on Cryptocurrencies and Digital Assets


The Budget 2022 focused on ‘digital and technology’ and sectors like infrastructure, health, education and provision of e-services to the masses. Budget 2022 has provided a sharp increase in public investment and capital expenditure provision. However, the most talked topic has been taxation on Virtual Digital Assets (VDA).


For the first time government has defined VDA under section 2(47A) under Income tax Act which is as under:

  • 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 (NFT) 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

‘Non-fungible Token’ means such digital asset as the CG may, by notification in the Official Gazette, specify


In simple terms VDAs are a superset for all digital assets being transacted on the blockchain, such as cryptos, NFTs, or any other virtual asset.


Taxation of Income from VDA


Government has proposed insertion of section 115BBH under Income Tax Act to tackle the taxation issues relating to the transactions of VDA. Summary of the proposed taxation on the Crypto currencies are as under:


  1. Income: Any income from transfer of any VDA shall be taxed @ 30%.

  2. Expenditure: No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition.

  3. Set off and carry forward of loss: No loss from transfer of virtual digital asset cannot be set off or carry forward and set off against any other income.

  4. Tax Deducted at Source: TDS on payment made in relation to transfer of VDA @ 1% of such consideration above a monetary threshold i.e., Rs. 50,000/10,000.

However, as per Finance Bill 2022 there are certain clarifications which needs to be provided from government, some of them are discussed below:


a) Finance Bill mentions that no set off of loss shall be allowed from transfer of virtual digital asset. Hence, clarity is required whether intra asset class set off of gains and losses from sale of multiple VDA will be available or not


Let us understand by following examples

  • 1 Ether bought at $2500 on 1st Feb and sold at $2700 on 25th Feb. Another 1 Ether was bought at $2650 on 26th Feb and sold at $2600 on 1st March. Here assessee’s net income is $150. However, it has earned $200 in first transaction whereas incurred loss of $50 in second transaction. Whether set off of gains and loss against such asset block will be allowed is yet to be clarified.

  • 1 Ether bought at $2500 on 1st Feb and sold at $2400 on 25th Feb. 1 Bitcoin bought at $35000 on 15th Feb and sold at $35200 on 28th Feb. Here assessee has earned $200 from Bitcoin and incurred loss of $100 in Ether. Set off of loss from Ether will be allowed against gain from Bitcoin (i.e, set off of loss calculated against per asset computation) is yet to be clarified.

  • Also, clarification is not provided for taxation of Barter of VDA (e.g., Suppose 1 Ether is purchased on 1st Feb for $2500 which is exchanged for 0.07 Bitcoin). Whether such exchange transaction is also included under section 115BBH.

b) Further, there is ambiguity regarding how transfer of VDA shall be recorded i.e., FIFO vs LIFO. However, for shares and mutual funds FIFO method is used which as of now seems to be best option for VDA also.


c) As per Finance Bill 2022 only cost of acquisition shall be allowed as deduction. Nevertheless, brokerage charges, Gas Fees, Exchange fees are incidental to trading of VDA and assessee receives the amount net of all these charges. Whether such incidental expenses will be added to cost of acquisition is not clarified.


TDS implication on VDA – Section 194S


The Union Budget 2022 has introduced TDS implication on VDA applicable from July 01, 2022. Provision of TDS is as under

  • Any person on payment of consideration to a resident for transfer of VDA shall withhold TDS @ 1%.

  • No TDS implication will arise where consideration is paid:

a) By specified person* and it does not exceed Rs. 50,000 in the financial year.

b) By any other person other than specified person and it doesn’t exceed Rs.10,000

  • No TCS implications will arise, where TDS has been deducted

  • No dual TDS implication u/s 194-O (i.e., deduction of TDS @ 1% by E-commerce operator)

*‘specified person’ means a person being

  • an individual or Hindu undivided family having turnover from Business more than 1 crore rupees or turnover from profession more than 50 lakh, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred;

  • being an individual or Hindu undivided family – having income under any head other than the head ‘Profits and gains of business or profession’.

Biggest implication of TDS will be for transaction through exchange where buyer and seller are not identified. Also, whether TDS implications will arise on Global Crypto exchanges is still not clear.


Gift of Virtual Digital Asset


Finance Bill 2022 has extended meaning of property as specified in explanation to clause (vii) of the Section 56 to include Virtual Digital Asset (applicable from April 1, 2022). Accordingly, gift of VDA shall be taxable in the hands of the recipient under section 56(2)(x). However, no specific guidance is provided for computation of Fair Market value (FMV) of VDA.


Taxation for FY21-22 (prior to April 01, 2022)


With implementation of Finance Bill 2022 from April 01, 2022, how tax is payable on these gains for current fiscal i.e. FY2021-22 is still a grey area.


One widely held view is that cryptocurrencies/digital assets may be considered as capital asset defined u/s 2(14) of Income Tax Act and transfer of such VDA is defined u/s 2(47).


Hence, tax on capital gains realized on sale of crypto assets held for 3 years or more can be paid at the rate of 20% with indexation for the current fiscal along with deduction of expenditure wholly and exclusively in connection with such transfer. However, if the gains from VDA during FY21-22 are short term in nature (i.e. the asset was held for less than 3 years) then the tax payable on them would be as per your income tax slab rate. Hence, if assessee’s income falls in the 30% tax bracket, then he/she would be paying the same rate of tax on the gains in this fiscal as you would if the gains were realized in FY2022-23.


Conclusion


Taxation of Virtual Digital Asset is a huge positive step for crypto industry as this removes any fear people had about impending ban. We can say that government is definitely inching towards regulations in this sector. However, many clarifications are required with respect to scope of cost of acquisition, set off of losses and gains and TDS deduction for transactions in Cryptocurrencies and Digital Assets.



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