Budget: Corporate Tax, AMT, Tax on Digital Assets

February 3, 2022

In her Budget Speech 2022, Finance Minister Nirmala Sitharaman shed light on tax liabilities for virtual assets like cryptocurrencies.

Key Facts

Income from any digital asset will now be taxed at 30 percent. There will be no deduction with exception of acquisition cost and TDS applicable beyond specified monetary threshold.
Loss from transfer of these digital assets cannot be set off against any other income.
There will be a tax deduction of 1% at source on such transactions.
Gifts of such assets will also be taxed.
30% tax was proposed on digital asset gains, irrespective of short or long-term holdings.

Legal status of digital assets

Recognition of digital assets under income tax is not similar to granting legal status.

About the bill

Bill provides for definition of virtual digital asset. It is wide enough to cover emerging digital assets such as assets in meta verse, NFT, tokens, digital currencies, etc. Bill also specifies a rider that no deduction will be allowed in respect of expenditure incurred on virtual digital assets except on cost of acquisition. In order to monitor Crypto transactions, a TDS of 1% will be levied on discharge of consideration whenever virtual digital asset will be transferred. It also provides for taxation on gift of virtual digital assets. In this case, recipient will be taxed. This will bring in additional challenges in operation of crypto exchanges worldwide and privacy concerns for individuals.

What does this imply?

This means that, if a person is holding cryptocurrencies, then income generated from such investment will be taxed at 30 percent. Any profits generated through cryptocurrencies trading would be taxed at 30%. It also includes taxing on gifts and transfer of virtual assets from one wallet to another owned by another person. Investors trading with cryptocurrencies will require to report gains or losses. Such gains or losses cannot be offset against other sort of income.

What are the concerns?

Proposed taxation is a stiff provision and will adversely impact investment in digital assets. Provisions related to relating to TDS might lead to unintended complications. Identity of payee is difficult while trading in digital assets. In case, PAN of payee is not available, it might attract a TDS of 20%.

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