Explained: How cryptocurrencies will be taxed after Budget 2022

 The budget proposes to tax virtual digital assets such as cryptocurrencies and non-fungible tokens. It has smartly used the word ‘transfer’ to bring more people into the tax net.

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.

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.