We all anticipated the Crypto Bill to be presented in the Budget Session but unfortunately the bill was not listed for presentation. The emotions turned into further disappointment when in the Union Budget, the Finance Minister Nirmala Sitharaman announced about the taxation for virtual assets.
The Union Budget
Owing to India constituting the highest number of crypto owners i.e., approximately 10 crores revealed by a study undertaken by BrokerChooser, there has been tremendous growth in the transactions of Crypto, NFTS, etc.,
To quote Nirmala Sitharaman, “there has been a phenomenal increase in the transactions of virtual digital assets and it is imperative to provide for a specific tax regime.” As a result of which, a new tax framework was rolled out concerning the transfer of virtual digital assets in the Union Budget 2022.
However, before we talk about the tax framework and its application to Crypto let’s understand the meaning of virtual digital assets.
What are virtual digital assets?
In the memorandum of the Finance Bill, the meaning of virtual digital asset as per newly inserted clause (47A) under Section 2 on the Income Tax Act, 1961, is defined as:
- Any information or code or number or token which is not an Indian or foreign currency i.e., generated through cryptographic means or otherwise that provide a digital representation of any stored value, exchange of value, and can be transferred, stored, or traded electronically;
- a non-fungible token or any other token of similar nature, by whatever name called;
- any other digital asset, as the Central Government may, by notification in the Official Gazette specify.
To summarize plainly, virtual digital assets include cryptocurrencies, NFTs, and any other asset generated as a code or number or token which is generated through cryptographic means but does not include any Indian or foreign currency. This list is not exhaustive and the Central Government can at any time amend or add to the list by notification in the Official Gazette.
Moving forward, let’s go through everything discussed in the Union Budget 2022 and all that you need to know about the crypto tax.
Levy of Flat 30% Tax Rate
Finance minister Nirmala Sitharaman announced in the union budget, “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 percent,”.
- Through the introduction of a newly inserted section 115BBH levy of a flat rate of 30% (plus cess and surcharge in applicable cases) will be charged on any gains or profits arising from the transfer of cryptocurrencies or any virtual digital assets.
- Except for the actual cost of acquisition, no other deduction will be allowed.
- The loss arising from the transfer of any other virtual digital asset cannot be set off from the profits arising from any other source of income e.g., salary, business income, etc.,
- Loss from virtual digital assets cannot be carried forward to the next year or any subsequent year.
Let’s take an example;
You had bought Bitcoin worth Rs. 30,000 and sold the same for Rs. 45,000. You have earned a profit of Rs. 15,000 (Rs. 45,000 – Rs. 30,000). You will be charged a flat rate of 30 percent on Rs. 15,000 i.e., Rs. 4500 (Rs. 15,000 x 30% i.e., tax rate).
You had bought Bitcoin worth Rs. 30,000 and sold the same for Rs. 45,000. You have earned a profit of Rs. 15,000 (Rs. 45,000 – Rs. 30,000).
Simultaneously, you had bought DOGE for Rs. 5,000 and sold the same for Rs. 3,000. You have incurred a loss of Rs. 2000 (Rs. 3000 – Rs. 5000).
Your net income from virtual digital assets is Rs. 13,000 (Profit of Rs. 15,000 – Loss of Rs. 2000)
Tax charged will be Rs. 3900 (Rs. 13,000 x 30% i.e., tax rate).
1% TDS (Tax Deducted at Source) on all Transfers
In addition to a flat tax rate of 30 percent, as per Section 194S of the income tax act, 1961 any payment of proceeds to a taxpayer who is a resident from the transfer of virtual digital assets will attract a 1 percent TDS on transactions above Rs 50,000 for specified individuals and Rs. 10,000 for others in one financial year.
On filing the income tax return after the end of the financial year, the credit for TDS deducted can be claimed.
This provision was brought in to bring ease to the government in tracking crypto transactions.
Specified individuals mean Individuals and Hindu Undivided Family whose business turnover does not exceed Rs. 1 crore and in the case of professionals, it doesn’t exceed Rs. 50 lakhs in the preceding financial year.
Let’s take an example;
You are transferring Ethereum worth Rs. 65,000 to a Buyer. In return, the Buyer will withhold 1 percent of the transaction as advanced tax i.e., Rs. 6500 and remit the balance of Rs. 64,350 (Rs. 65,000 – Rs. 650) to you AKA the Seller.
Challenges faced due to 1% TDS on Crypto
- In the complex world of Crypto, it will be extremely difficult for the buyer to identify the seller for deducting 1 percent as advance tax which will lead to a compliance nightmare.
- The Crypto market is a global market; therefore, the question arises of how will TDS be deducted if the seller is a foreigner and the buyer is an Indian?
- Short-term traders will fall short of capital if on every trade 1 percent TDS will be deducted, irrespective of gain or loss, as a lot of their capital will be locked against their PAN for a whole year.
E.g., a short-term trader does 10 transactions of Rs. 200,000 each, his capital of Rs. 20,000 (200,000 x 10) x 1%] will be locked for the whole year thus reducing his overall capital.
- A broking fee is charged by Crypto exchanges on every transaction. Short-term traders carry out significant amounts of transactions every day but due to the new 1 percent TDS rule, short-term traders will fall short of capital and their frequent transactions will reduce drastically cutting short the broking fee earned by Crypto exchanges.
Long term Gains and Short-term Gains
From the financial year 2022-2023, the tax rate of 30 percent will apply to all crypto transfers but for the financial year 2021-2022 ending on 31st March 2022, by treating cryptocurrencies, NFTs at par with securities. You can pay tax at
- 20% on capital gains on the transfer of cryptocurrencies and NFTs held for 36 months or more i.e., long term gains,
- Tax as per applicable income tax slab rates on short-term capital gains i.e., gains on cryptocurrencies and NFTs held for a period less than 36 months.
Taxation on Airdropping Cryptocurrencies and Gifting NFTs
As discussed in the Budget, gifting of NFTs or any other digital virtual asset or airdropping cryptocurrencies will be subject to levy of taxation in the hands of the recipient.
Taxation on Realized Gain
Cryptocurrencies and other virtual digital assets will be subject to taxation only on the realization of the profit i.e., only holding cryptocurrencies or other virtual assets will not attract any tax. Tax will be attracted solely on gains arising from the transfer of cryptocurrencies or other virtual assets.
But that does mean that realized gains are chargeable to tax only after such amount is transferred into an individual’s bank account. Withholding the realized gains in your wallet or exchange does not allow you to escape from the purview of taxation on gains arising on transfer.
Launch of Digital Rupee
It was stated in the Budget that RBI will be rolling out its own digital currency i.e., Central Bank Digital Currency (CBDC) based on blockchain, later this year. The Digital rupee will be used in contactless transactions, it will be a form of electronic money.
In the post Budget press conference, Nirmala Sitharaman announced that the Digital Rupee issued by RBI will be considered as currency and mentioned that cryptocurrencies and NFTs are digital assets and not currency.
Social Media reactions on Crypto Taxation
Right after the release of the Union Budget, Indian Twitter users stormed the internet and showed resentment towards the 30 percent tax rate proposal and the #reducecryptotax was trending. The users shared the following thoughts:
- Crypto tax rate should be as per slab rate as not everyone making money out of crypto is earning more than the basic exemption limit.
- No TDS should be levied as it would lock 1 percent of each transaction leading to draining of liquidity from Indian exchanges.
- Loss on transfer should be carried forward.
- The high tax rate of 30% will kill the mining of Cryptocurrencies in India.
There is also an ongoing petition on change.org ‘Government of India: Introduce Reasonable Crypto Tax Policies’ for the reduction of the 30 percent tax rate on cryptocurrencies. It has been signed by almost 90,000 people.
In my opinion, high tax rates with no option of setting off and carrying forward of losses and the introduction of a 1 percent TDS rate were brought in to discourage investors from investing in a volatile market. Compliance with these provisions will be a nightmare as there is no proper bill regulating cryptocurrencies as of now. Cryptocurrencies and NFTs are classified as Digital assets as per their tax structure. The taxation provisions will take effect from the assessment year 2023-2024 i.e., all your crypto transfers will be taxed at 30 percent from the financial year 2022-2023. The levy of tax on Crypto in the Union Budget has not provided us with any clarity about the legality of Crypto trading.
If you thought Crypto has now become legal in India after its taxation, here is a wake up call for you-ITS NOT! As stated by Nirmala Sitharaman, a week after the Union Budget, it is the sovereign right of the Government to tax transactions involving profit earned on virtual digital assets irrespective of the legal ambiguity about the trading of virtual digital assets. Therefore, much to everyone’s disbelief, the taxing of the virtual digital asset does not provide any assurance as to the legality of trading Cryptocurrencies, NFTs, or any other virtual digital asset. Crypto transactions are neither legal nor are they banned in India.