The Union Budget 2021-22 has sought to impose taxation on Virtual Digital Assets (VDAs) such as Bitcoin, Ethereum, Dogecoin etc.
FEATURES OF TAXATION PROPOSALS
Definition of Virtual Digital Asset (VDA): Any information, code, number, or token generated by way of cryptographic or other means and (a) has inherent value or (b) Act as Unit of account or (c) Act as store of value. Hence, it includes all the crypto assets, Stable coins, Non-Fungible Token (NFT) etc.
Mechanism of Taxation:
- The profits earned from transfer of a virtual digital asset shall be taxable at 30%.
- Loss from any other source of income shall not be set off against the income from virtual digital assets. Similarly, loss from the sale of VDAs shall not be set off against income from any other source.
- Gifting of virtual digital assets has been brought under the ambit of taxation.
- Deduction of 1% of the payment amount at source and deposition of the same with the government.
BENEFITS
Wider and Encompassing definition which would bring all form of private cryptocurrencies within the ambit of tax. The definition is broad enough to cover cryptocurrencies as we know them today and also accounts for future developments in the crypto ecosystem by not restricting itself to just tokens.
Provide more clarity on taxation on Virtual Digital Assets (VDAs): Even prior to the introduction of VDAs, the individuals were already filing tax on income earned from VDAs. However, there was considerable amount of confusion and uncertainty. The new scheme of taxation would provide guidance to the investors on their investment in cryptocurrencies.
Taxation on VDAs move towards effective regulation: As of now, Cryptocurrencies are neither considered as legal nor illegal. They operate in regulatory and legal vacuum. Taxation of VDAs is a first step towards effective regulation.
Curb Volatility: High tax rate on VDAs accompanied by TDS of 1% would discourage investors looking for short term returns. Instead, it would attract long term investors who look at VDAs as an assets and hence provide more stability in the market.
Tackle Black Money: Usually, tax evaders have been using crypto transactions to park their black money abroad and fund criminal activities, terrorism, etc.
PROBLEMS
Lack of clarity on legality of cryptocurrencies: Taxation of Virtual Digital Assets have led to a clarity on the issue of taxability of cryptocurrency, however, it is still very unclear whether the government is going to ban the currency or legalise it by regulating it.
Punitive Taxation: While taxation brings legitimacy to the industry, the high tax rate is discouraging.
Negative impact on the crypto industry including crypto exchanges, miners, traders and investors.
One Size Fits all approach: All the investors would be subject to the same tax rate irrespective of the period of holding units of cryptocurrency.
Lack of Clarity:
- Uncertainty about the Reward points earned on Debit/Credit card transactions generated through electronic means.
- Lack of clarity as to whether mining would include transfer of VDAs. This is so because in the case of mining or staking, a reward is paid to the miners and stakers. The coins are not paid by an entity but are won on the network. Hence, there is no transfer per se. Therefore, there is a lack of clarity whether the term ‘transfer’ would include the activity of mining and staking cryptocurrency.
WAY FORWARD
The trade in Virtual Digital Assets such as cryptocurrency and NFTs is increasing at a rapid pace. There was a requirement for clarifying the position on taxability of digital virtual assets. The proposals have surely brought a clarity on some issues.