Can you tell me about the taxation of virtual digital assets as spelt out in the Union budget 2022?

The much anticipated Cryptocurrency Bill was not passed in the Budget 2022. However, a different kind of start has been made. Budget 2022 announced that all virtual digital assets will be brought under the tax ambit. Even though the government denies it, imposing a tax instead of a ban automatically legitimizes an asset class, especially important in the case of the highly controversial digital assets and cryptocurrency. Here are some highlights.

· Budget 2022 has clarified that any income arising on transfer of virtual digital assets will be taxed at the rate of 30% of the gains. This will be a flat tax and there will be no tenure based classification of long-term / short-term gains.

· The concerned assessees / traders who earn such income from virtual digital assets cannot set off any other incidental expenses against the gains. This will be the case, even if the expenses were incurred directly in connection with the virtual digital asset business. Only the cost of acquiring the virtual digital asset would be considered.

· In the event of any loss arising from the transfer of virtual digital assets, these losses cannot be set off against any other income or heads of capital gains. These losses can only be set off against the gains from virtual digital assets. Being non-asset based speculative income, losses can be carried forward for only 4 years in succession.

· Virtual digital assets can be gifted under the rules. However, such gifts would be treated as income in the hands of the recipient of the gift and since the base cost is zero, the entire consideration will be taxed as gift at the rate of 30%. This is likely to largely discourage any gifting of virtual digital assets to escape the tax net.

· Last, but not the least, Budget has ensured that there is a proper audit trail of the transaction and for that there would be 1% TDS imposed on the consideration. This would only be applicable above a certain monetary threshold. This is purely for audit trail purposes and like any other TDS, set off against virtual digital asset gains.