Tax on Virtual Digital Assets: Costs for investors

The Finance Minister in Budget 2022 announced a 30 percent tax on income resulting out of transfer of digital assets and loss if any, won’t be set off against any other income. This provision was necessary to keep a check on money that was flowing in cryptocurrency market.

Although, the cryptocurrency now falls under tax bracket but, in any manner, it does not confer that these assets are recognized.

Highlights of the budget on Virtual Digital Assets

• Any income from transfer of virtual digital assets shall be taxed at the rate of 30 percent.
• No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition.
• The loss from transfer of virtual digital asset cannot be set off against any other income.
• Transfer of virtual digital asset will attract a TDS at the rate of 1 percent of such consideration above a monetary threshold.
• Gift of virtual digital asset is also proposed to be taxed in the hands of recipient.

Discussion

The taxation of cryptocurrency was long overdue. Investors were in expectations of grant of recognition to these assets. The assets are not regulated and Finance Minister said the consultations with stakeholders are underway. The announcement has been disappointing for crypto investors. The taxation will make the assets costly as compared to other investment alternatives. The costs are high as unlike other capital assets there will be no deduction on account of expenses on transfer, the benefit of indexation is also not available and losses if any, cannot be set off against other incomes. Further, it is coupled with launch of digital currency by RBI. It may however be said that the intention was to discourage investment in cryptocurrency. On the other hand, issue of sovereign backed digital currency is the need of the hour. It will strengthen the payment infrastructure giving a boost to digitization.