Cryptocurrency holders in India will be subjected to tax under the new scheme for Taxation of Virtual Digital Assets from April 1. The tax imposition was announced by the Finance Minister in the Union Budget 2022-23. The announcement brought clarity pertaining to the levy of income tax on virtual digital assets like bitcoin, ETH, and NFTs. 

Financial Minister Nirmala Sitharaman in the Union Budget 2022 announced that "any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent."  A new section 115BBH has been inserted into the Income-tax Act, 1961 for taxation of virtual digital assets. The proposed law will take into effect from tomorrow. 

The taxation at 30%, with the cost of acquisition as the only allowable deduction, is among the highest rates of taxation for cryptocurrencies in the world. The tax rate is on par with the rate on profits arising from gambling.

The government in Lok Sabha has clarified that losses from one crypto can’t be adjusted against gains from another. This rule is expected to impact those who are at loss. If investors sell their crypto by 31 March, their losses from cryptos can possibly be adjusted against other capital gains. From 1 April when the new tax regime comes into force, no such adjustment will be allowed. The tax regime is aimed at bringing regulatory clarity while discouraging investments in cryptos. 

“It’s a continued effort to isolate and disincentivize cryptocurrency-related activities in India. The prevention of offset between different cryptos will negatively impact traders,” Rohinton Sidhwa, Partner, Deloitte India was quoted by Economic Times. 

In a written reply to Lok Sabha, the government said, "infrastructure costs incurred in the mining of VDA (eg. crypto assets) will not be treated as the cost of acquisition as the same will be in the nature of capital expenditure", which is not allowable as a deduction under the proposed tax regime. This is also expected to increase compliance on exchanges and other intermediary platforms as they are required to withhold 1% TDS on the transactions and remit them to the government. 

"The loss in one VDA will not be set off from profit in another VDA. Hence all loss transaction will be ignored for tax calculation and only profit will be calculated. All trading pairs be it fiat to crypto OR crypto to crypto will be a taxable event. Apart from holding and trading even gifting of VDA be will taxable in the hands of the recipients. This tax bill even covers miners as no expenses of setting up mining are allowed as deduction. Therefore mining transaction cost of purchase will be Zero. What can be set off is only the cost of acquisition/purchase on VDA," Manoj Dalmia, founder, Proaasetz Exchange was quoted by Outlook India.