Union Budget FY2023 has finally ended the speculation about the impending ban on cryptocurrencies in India by introducing a 30% tax on transfer of virtual digital assets. The Finance Bill’s definition of virtual digital asset is wide enough to cover emerging digital assets, including non-fungible tokens (NFTs), metaverse assets, digital currencies and tokens. The industry has welcomed the move, though some veterans say that the high tax rate and no setoff of losses against other income may discourage people from dealing in cryptocurrencies.

Does recognition of digital assets under income tax laws mean they have got legal status? What are the grey areas?

Most importantly, what do the changes mean for investors?

Crypto is an Asset

“A currency is a currency only when it is issued by the central bank, even if it is a crypto. Anything outside of that, what we refer loosely as cryptocurrencies, are not currencies,” the finance minister said while clearing the air around cryptocurrencies at her post-Budget press conference. “We are not taxing the currency (digital rupee) that is yet to be issued by RBI. Everything that prevails outside of it, in the name of digital, are assets being created by individuals. And if profits are being made by transacting those assets, we will tax them at 30%.” She said government will keep a watch on the crypto world by imposing a 1% tax deducted at source (TDS) on every transaction.

Amitabh Kant, CEO, NITI Aayog, gave more clarity and said government is not banning cryptos. “Once you start taxing, it means you will have a regulatory mechanism, whether some aspect is regulated by RBI or Sebi. The Budget provides absolute clarity. Government has not banned cryptos. It has, in fact, treated crypto as an asset class, defined as a virtual digital asset,” he told Fortune India.

The Tax Implication

The crypto asset market in India is worth $15 billion, says a report by CREBACO, a research, rating and intelligence firm focused on blockchain and cryptocurrencies. The report says the Indian crypto community may have over six million people or 0.5% of the country’s population. Centre calls the numbers highly exaggerated, but acknowledges that transactions have been rising. “There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. I propose that any income from transfer of any virtual digital asset shall be taxed at the rate of 30%,” she said in her Budget speech. This will be applicable from April 1, 2023, that is, for income earned from April 1, 2022, to March 31, 2023.

“To some extent, I feel it’s a knee-jerk reaction by government to show that they are doing something in this space,” says Badri Narayanan, executive partner, Lakshmikumaran & Sridharan Attorneys. “I believe some of these things will be clarified or amended. Some tax experts are unhappy with the high tax rate. These are the highest level of taxes possible on cryptocurrencies,” says Narayanan. Others agree. “Taxation of profits at 30% may not receive equal appreciation from all stakeholders,” says Jay Hao, CEO of OKX.com, the world’s second-largest crypto exchange. It may discourage investors, he says.

digital assets tax

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