Considering the phenomenal increase in transactions in virtual digital assets (VDAs) such as cryptocurrencies and non-fungible tokens (NFTs), which are further defined as part of the proposals, Budget 2022 has introduced a new scheme for the taxation of such VDAs. Here is a look at the taxability of these assets.
Computation Of Income From Transfer Of VDA: The Finance Bill proposes to outline a special taxation regime providing for income-tax liability on the transfer of any VDA at the rate of 30 per cent (excluding applicable surcharge and cess). Further, while computing income from transfer of VDA, deduction shall be allowed only regarding the cost of acquisition. No deduction is permissible for any other expenditure, allowance, or set-off of any loss.
Set-Off And Carry-Forward Of Losses: No set-off of loss from the transfer of VDA shall be allowed against income computed under any other provisions of the Income-Tax Act, 1961. Further, such loss shall not be allowed to be carried forward to subsequent assessment years.
These amendments shall be effective from the fiscal year 2022-23.
Withholding Tax Implications: Further withholding of tax at the rate of 1 per cent of consideration shall be required to be made while making payment for the transfer of VDA to a resident except for a nominal threshold of Rs 50,000 or Rs 10,000, as the case may be.
Gifting Of VDA: The Finance Bill proposes to include VDA under the expression "property," thereby making it taxable for the recipient.
A Global Comparison
While India considers income from the transfer of VDA as a special taxation regime, other nations consider such transfers of digital assets held for investment purposes as capital gains. Further, while India does not allow set-off or carry-forward of losses on the transfer of VDA, nations such as the US, the UK, Australia, etc., allow set-off of losses from the transfer of digital assets against capital gains, and vice-versa.
Some countries such as the US, the UK, Australia and Singapore treat income from mining or staking as business income, whereas India has not laid down specific guidelines to tax such income.
Also, for computing capital gains, the Australian tax law allows the cost base to include the cost of ownership, including the purchase price, plus certain other costs associated with acquiring, holding, and disposing of it. The UK revenue and customs authority also allow certain costs, including transaction fees and exchange fees, while computing the income from the transfer of digital assets.
Much Clarification Needed
Considering that India has recently introduced taxation on the transfer of VDAs, it has not allowed any deduction for expenses, thereby making this a prohibitive taxation regime.
These provisions are a breakout in terms of taxation of VDAs, and some areas need to be addressed. For example, the taxation of income arising from the transfer of VDA before the introduction of these proposals would need to be clarified.
The provisions also propose to tax VDA received as a gift in the hands of the recipient. However, the corresponding provisions that allow the step-up of gifted VDA costs must be defined to mitigate double taxation.
There is also ambiguity about the permissibility of loss incurred on the transfer of VDA during the year. This needs to be clarified because the intent of the proposals seems to be restricting the set-off of losses against other incomes. The provisions also need to clarify the taxability in the case of an exchange of assets, whether concerning VDA or others.
In conclusion, though the current provisions have been introduced as a special regime that does not incentivise investments in VDA, it is possible that, like other nations, even India would ease out these provisions and pave the way for crypto investments, especially considering the announcement of the Digital Rupee to be introduced by the Reserve Bank of India.