Context: Recently, Union Finance Minister in her Budget 2022 announced a 30 per cent tax on income from virtual digital assets (particularly aiming Cryptocurrencies).
Key takeaways from FM’s speech

• The bill provides for the definition of virtual digital asset which is wide enough to cover emerging digital assets including NFT, assets in metaverse, cryptocurrencies etc.
• This recognition of digital assets under income tax is NOT akin to granting legal status.
• Additionally, she also proposed a Tax Deduction at Source (TDS) on payment made in relation to the transfer of virtual digital assets at 1% above a monetary threshold.

About Virtual Digital Assets

• To define the term “virtual digital asset”, a new clause (47A) is proposed to be inserted to section 2 of the Act.

A virtual digital asset is proposed to mean any information or code or number or token (not being Indian currency or any foreign currency):

• Generated through cryptographic means or otherwise
• Providing a digital representation of value which is exchanged with or without consideration with the promise or representation of having inherent value
• Functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes
• Can be transferred, stored or traded electronically.
• Non fungible token (NFT) and; any other token of similar nature are included in the definition.

Why there is need to tax them?

• Popularity: Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets has increased substantially.
• Growing market: Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset.
• Increased transactions: There has been a phenomenal rise in such transactions and the magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.
• Prevalence of gifting: The gifting of virtual digital assets is also a popular mode of exchange.

How are Virtual Digital Assets different from Digital Currency?
A currency is a currency only when it is issued by the central bank even if it is a crypto.

• However, anything which is outside of that loosely all of us refer it to be cryptocurrency but they are not currencies.
• These can be referred to as Virtual Digital Assets.

Virtual Digital Assets also include Non-fungible tokens or NFTs , which are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. NFTs can also be used to represent individuals' identities, property rights, and more.

• This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions.

The Finance Minister clarified that what the RBI will issue in the next fiscal will be the digital currency. This will be called Digital Rupee.