All About Cryptocurrency Taxation Introduced in Budget 2022

Virtual Digital Assets (VDA) Defined (Section 2(47A)

A new section 2(47A) is proposed to be inserted by Finance Bill’2022, which defines virtual digital assets to mean any information or code or number or token (not being Indian currency or any foreign currency) generated through cryptography which provides a digital representation of value exchanged with or without consideration. Non-fungible tokens (NFTs) are included as well, in addition to cryptocurrencies.

Applicability

These regulations are expected to go into effect on April 1, 2022.

Tax rate (Section 115 BBH)

Section 115BBH is proposed to introduced which would levy a 30% tax on any gains derived from the transfer of any virtual digital asset, plus any appropriate surcharge and cess.

No deductions and set-off available of VDA losses with any other income

Any expenditure (other than the cost of purchase) or set-off of any loss while computing income in the event of a transfer of such asset would be disallowed. Carry forward of such losses is not allowed as well.

Withholding tax provisions (TDS) (Section 194S)

TDS provisions have been implemented with section 194S to track the transaction trail and broaden the tax base by levying a 1% tax on payments for the transfer of virtual digital assets to a resident. Compliance burden is likely to be increased due to the same.

TDS provisions are not applicable if the consideration payable is less than INR 50,000 by individuals or HUFs who do not have any business income or whose total sales, turnover, or gross receipts do not exceed INR 1 crore in the case of business and INR 50 lakh in the case of the profession during the financial year preceding the year in which such asset is transferred. In the case of any person other than the above, the said limit is proposed to be INR 10,000 during the financial year.

These TDS provisions are likely to take effect from 1st July 2022.

Tax on gifting VDAs/cryptocurrencies/non-fungible tokens

The gifting of cryptocurrencies shall also be taxable in the hands of the recipient. In Section 56(2)(x), the expression “property” shall include virtual digital asset. This shall prevent tax leakages through gifting transactions.

Unaddressed areas

There are several areas that still need clarity are the manner of determination of situs in case of non-resident sellers, equalisation levy implications on exchanges, how the above TDS needs to be paid, intra-head set off of crypto losses , the taxation of income for prior years , etc. In addition to the same, there are likely to be open issues around the definition of a virtual digital asset in terms of interpretation as well.

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