The Budget 2022 finally brings in clarity on the taxation of Virtual Digital Assets (VDA) such as Crypto, NFT, etc.
FM Nirmala Sitharaman also announced – RBI is also going to launch its own digital currency called ‘Digital Rupee‘ by 2023.
What is a Virtual Digital Asset?
Virtual Digital Assets include Cryptocurrencies, Non-Fungible tokens i.e. NFT, or any other digital asset specified by the Central government.
What is the Tax Treatment?
All Virtual Digital Assets will be taxed as the following:
- Income Tax as per section 115BBH applicable from 1st April 2022 onwards:
- 30% Tax rate
- Treatment of loss
- Losses transfer cannot be set off against any other income
- Losses cannot be carried forward
- Loss under any other income head cannot be set off against VDA income
- Gift is taxable in the hands of the reciever
- Cannot claim expense or allowance in relation to the transfer of VDA. Expenses such as electricity, internet, depreciation, etc which are allowed for trading cannot be claimed when trading crypto.
- Taxpayer can claim the cost of acquisition i.e purchase price from the sales consideration i.e. selling price.
Taxable transfer of VDA = Selling Price – Purchase Price
- TDS u/s Section 194S effective from 1st July 2022 onwards
- TDS should be deducted at 1% on payment if transfer amount exceeds INR 50,000 (Individual/HUF payer having income from B&P) or INR 10,000 otherwise.
What will be Income Head?
There is still confusion to classify Income from transfer of crypto, NFTs, etc under the relevant Income head.
Under one school of thought, it should be reported under the ‘Income from Other Sources’ since:
- a special section 115BBH under the Income Tax Act is introduced. This section is on lines of lottery, betting and gambling income u/s 115BB, these are taxed under the head IFOS.
- Crypto, NFTs and other VDAs are not included in the defination of capital assets u/s 2(14).
On the other end, another school of thought suggests that it should be included under the head ‘Income from Capital Gains’ because:
- definition of capital asset includes “any other capital asset”, which may/may not include crypto, NFTs, etc.
- the term “transfer of assets” is usually referred in relation to capital assets
- the term “cost of acquisition” is often used when calcualting income under the head ‘Income from Capital Gains’
Let’s hold up for the circular from the Income Tax Department for the final word.
What about different VDA activities and transactions?
Profit/Loss from the transfer is a small subset of crypto, NFT, and other digital transfers.
Other activities with Virtual Digital Assets encompass:
- Crypto Derivatives trades eg: Bitcoin Options, Ethereum Options, Bitcoin Futures, etc. Since derivatives trading doesnot include transfer of VDA, it cannot be classfied as “trasfer of asset.
- Other Incomes from Crypto earned such as Reward Income from Crypto staking, etc; it is usually earned from pledging of cryptos and therefore no trasnfer is involved.
- Transfer of crypto within different wallets of the same trader; since there is no change in ownership.
- Crypto and NFT trades/transfers are not restrcited to a specific country, therefore clarrification is awaited on the compliance requirements for TDS deduction.
- One of the fundamentals of trading crypto does not necessarily reveal the identity of the counterparties, deducting and depositing TDS may be a challenge.
These activities cannot be explicitly classified as “Transfer of VDA”, and hence need clarification on their tax treatment.
After almost a year full of uncertainty and confusion, today’s budget addresses these concerns to an extent. However, with the universe of crypto, NFT, and yet to arrive digital assets, there is a long way to go.