How is Virtual Digital Assets Tax Calculated?

Virtual Digital asset taxation has been introduced in Budget 2022. So, here is everything you should know about this.

Virtual digital assets are a new and broad class of investments. It consists of many things like cryptocurrencies, NFTs, virtual real estate, etc. The world has transitioned rapidly towards blockchain technology in the last couple of years, and virtual digital assets have seen immense growth.

For the context of growth, Crypto punks, the most famous NFT collection today, was sold for just Rs 1300 to Rs 1500 when it was first minted between 2016-2018, but today its average value is above Rs 3.5 crores. There are many such examples of growth in digital asset investments. Indians have been investing significantly in these new technologies and asset classes, and thus the government has taken a step towards taxing the income from this too. So let's start by knowing what are virtual digital assets according to the budget 2022.

What Are Virtual Digital Assets?

In the budget 2022, the government has proposed a new clause 47(a) to section 2 of the finance act to explain and clarify about virtual digital assets. During the speech, the finance minister addressed virtual digital assets as any information or token that is created using cryptography that can be exchanged with the promise of an inherent value.

Also Read: Budget 2022 Announcement Regarding Digital Assets And Cryptocurrencies

This includes things like cryptocurrencies, digital art, NFTs, tokens, and even virtual real estate.

This post will shed all your doubts regarding how virtual digital assets are taxed after the union budget 2022. So let’s start right away.

How Are Virtual Digital Assets Taxed?

The union finance minister said virtual digital asset transactions have increased by many folds in the last few years. Due to this, there is a requirement to introduce a digital asset tax to regulate this investment option better.

There are two taxes that will be levied in the upcoming time of digital assets and cryptocurrencies. So let’s understand them.

Tax Deducted At Source

TDS is a class of tax that is usually paid by everyone when they transact on something. TDS is included in most purchases we make today, and it is also deducted from our salaries. So it is a pretty common tax type.

All transactions for virtual digital assets will attract 1% TDS. This includes transactions like the transfer and purchase/sale of all digital assets like cryptocurrencies, NFTs, and virtual real estate.

Capital Gains Tax

Capital gains tax is set at a flat rate of 30% for all crypto gains. The finance minister has clarified that there is no provision to offset the losses against gains to decrease the tax to be paid. The new tax slabs will be applicable from April 1, 2022. So, if you gain money from crypto transactions and virtual digital assets before April 1, 2022, you can pay them as regular capital gains but after that, every gain will be taxed at a flat rate of 30%.

For example, if you earn Rs 5,00,000 from trading cryptocurrencies in a year, and in the same year, you have a loss of Rs 1,50,000. So traditionally, you think that your net gain is Rs 3,50,000, and you plan to pay tax on that amount only. This is right for traditional capital gains, but when it comes to crypto and digital assets' capital gains, there is no provision to offset the losses. Meaning Rs 5,00,000 is your total profit for the year, and you need to pay a flat tax of 30% i.e. Rs 1,50,000. So at the end of the year, after removing the losses you get around Rs 2,00,000 to keep from all the gains that you have throughout the year.

This restriction in offsetting losses is not welcomed by experts, and many believe that it will diminish the popularity of this new asset and investment class.

Also Read: How To File Capital Gains Tax?

Currently, TDS and flat 30% are the two taxes are that the government has introduced. There are chances that the government will enhance these taxation policies in the coming years. As this is the first step towards a better India and a pilot tax policy for such virtual assets, the government will indeed amend the procedure to make it more inclusive and beneficial for the growth of this technology.

Also Read: How Budget 2022 Affects Your Crypto Investments