The central government has proposed to tax cryptocurrencies and other virtual digital assets like non-fungible tokens (NFTs) even though there is no settled policy governing these instruments.

A cryptocurrency bill was originally proposed to be introduced in the winter session. It now appears that the bill will not be tabled in the budget session either, which means that these products will continue to operate in a grey area till a legislation to regulate these assets come in.

The Union budget has defined a virtual digital asset fairly broadly and introduced a new section 115BBH which mandates a 30 per cent tax on income from transactions in such assets.

“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. Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent,” finance minister Nirmala Sitharaman said in her budget speech.

“No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Further, loss from transfer of virtual digital asset cannot be set off against any other income,” the finance minister said.

The budget has also proposed a 1 per cent TDS (tax deducted at source) on payments towards virtual currencies beyond Rs 10,000 in a year and taxation of such gifts in the hands of the recipient. The threshold limit for TDS would be Rs 50,000 a year for specified persons, which include individuals/HUFs who are required to get their accounts audited under the Income Tax Act.

Speaking later at a media conference, the finance minister clarified: “What Reserve Bank issues is the digital currency… everything that prevails outside, in the name of digital whatever, are assets being created by individuals. If profits are made on any transactions on these assets, we will tax it at 30 per cent.”

The government’s decision has evinced a mixed reaction from the cryptocurrency industry and market analysts. While the crypto exchange owners remained cautious in their comments, some analysts have questioned the wisdom in taxing such assets in absence of any central regulation.

“Today’s budget has ensured a very bright future for Indian crypto ecosystem,” said Nischal Shetty, the founder and chief executive of crypto exchange WazirX.

“The taxation of Virtual Digital Assets, or Crypto, is a step in the right direction. It gives much-needed clarity and confidence to the industry. India’s focus on digital innovation and the promotion of blockchain technology is welcome,” said Sumit Gupta, the co-founder and CEO of CoinDCX.

“The regulatory guidance on tax from the government furthers the mainstreaming excitement of this emerging asset class with over $6 billion worth of investments in India. It is also the gateway to the future decentralised world,” said Ashish Singhal, the founder and CEO of CoinSwitch Kuber.

“This move formally brings virtual digital assets such as cryptocurrencies and non-fungible tokens under the tax net, thereby increasing the probability of virtual digital assets being recognised by the government and accelerates the probability of the Crypto bill being formulated and approved,” said PwC India in a statement.

“The introduction of TDS on crypto-transfers will enable the government to better monitor crypto transactions,” Amit Singhania, partner at Shardul Amarchand Mangaldas & Co, said in a statement.

However, NA Shah Associates’ founding partner Ashok Shah called the move a “deadly blow” to the virtual digital ecosystem. “The proposed measure is a stiff provision and will adversely impact investment and dealing in digital assets,” he added.

“Apart from the ‘digital rupee’, the government is not keen to recognise the availability of any other kind of digital currency in India. As a result, free market players will not be permitted to operate or use cryptocurrencies other than the digital currency issued by RBI. This will prevent market players from entering into several digital transactions that require such other kinds of cryptocurrencies. Hence, the only way to bridge this gap would be if the

government came up with a set of regulations to govern all kinds of digital currencies in use in India, instead of a sole government controlled currency.” Probir Roy Chowdhury, partner, J. Sagar Associates (JSA).

Rameesh Kailasam, CEO of IndiaTech.org, said the move to consider cryptocurrency and NFTs as virtual digital assets is a welcome move. “However, more clarity needs to emerge on taxation for one trading in crypto as an exchange. We also need clarity on the calculation of the cost of acquisition in order to determine gains on any transaction…. The tax rate should ideally have been around 20 per cent instead of 30 per cent, as a high rate may deter people from jumping on to the crypto bandwagon,” he added.