5 Cryptocurrency questions after Budget 2022, answered

Taxes are complicated. Cryptocurrency is complicated. Add the two to the mix and it’s a web of complications for investors to tread. As part of the Union Budget 2022, India just made some major announcements affecting the cryptocurrency sector.

India levies 30% tax on cryptocurrency transfers. Illustration: Geetanjali/DailyO

Here are the answers to 5 questions on cryptocurrency, summing up Budget 2022:

1. WHAT IS THE CRYPTO TAX?

Union Finance Minister Nirmala Sitharaman during the Budget 2022 speech announced that transfer of virtual digital assets will be taxed at 30%, the highest tax band in the country. She also clarified that losses from these virtual digital assets cannot be offset against other income or gains - meaning that investors cannot avoid taxes on crypto gains by citing losses during crypto trade.

She also added that there will be 1% tax deducted at source on payments made for the transfer of the digital assets. Moreover, virtual digital assets given as ‘gifts’ will also be liable to 30% taxes, that will be borne by the recipient (doesn’t sound like a great gift, tbh!).

The tax proposals will come into effect from April 1, 2022, once the Union Budget is passed in the Parliament.

2. WHAT IS A VIRTUAL DIGITAL ASSET?

Nirmala Sitharaman was very specific in her ‘term’ for cryptocurrency: Virtual Digital Assets.

According to the Finance Bill, a virtual digital asset is any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value 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 including its use in any financial transaction or investment, but not limited to investment scheme, and can be transferred, stored or traded electronically.

The government will be clarifying more on what cryptocurrency means in detail later, after a stakeholder meeting. 

3. WHAT DOES THE CRYPTO TAX MEAN?

Here are 3 points explaining in simpler terms what the Crypto Tax means and entails:

1. The new crypto tax also doesn’t distinguish between short term or long term holdings unlike in the equity markets, where there are separate taxations based on period of holding.
2. It is unclear whether the tax regime will be applicable retrospectively too, meaning about the gains made in the past.
3. Importantly, the government says it will be able to track each transaction with the 1% TDS, when cryptocurrency transactions are largely known for being anonymous.

4. WHAT IS DIGITAL RUPEE?

Besides the tax that has consumed the debate on cryptocurrency, FM Sitharaman also announced that RBI will soon roll out its own version of a fiat currency – a digital rupee – in line with several other countries like China.

To be clear, the digital rupee does not figure under the current crypto tax regime. This was also clarified by the Union Finance Minister during a presser post Budget 2022. More on this will be revealed by RBI in the coming days.  

It seems like only yesterday the government was considering a blanket ban on cryptocurrency and now here they are trying to make money themselves.

5. WHAT IS THE REACTION?

The announcement has been welcomed by founders of cryptocurrency platform like WazirX, who’ve said that with the tax decision, the Indian government has indirectly ‘legalised’ cryptocurrency.

And of course social media is awash with memes on taxing cryptocurrency and other digital assets too.

More clarity on the crypto tax is expected in the coming days. However, reports suggest that the tax announcement may lead to investors moving to platforms in other countries, reducing the revenue for the Indian government.

Coincidentally, while India announced its tax plan for the crypto world, Thailand rolled back its plans to impose a 15% withholding tax on crypto transactions after facing pushback.