India is one of the biggest economies in the world and has been making moves to embrace cryptocurrencies and blockchain technology. The country has announced plans to implement a crypto tax for FY 22-23. 

Cryptocurrencies are still relatively new and unregulated, which has created some confusion about their taxation in India. Finance minister Nirmala Sitharaman's budget speech on February 1 brought clarity to the matter, but there are still some unanswered questions. So, this article discusses India's crypto tax plan in detail.

What Is a Virtual Asset and How Do They Work?

A virtual Digital Asset (VDA) is a digital representation of an asset that can be used to represent and exchange value. Virtual assets are created by using algorithms and code to create a digital product with the same properties as an actual physical product. These virtual assets can then be traded between people, used in games or applications, or stored in digital wallets.

VDAs are believed to be codes or numbers or tokens that can be transferred, stored, or traded electronically, as stated in the Finance Bill 2022. Cryptocurrencies and non-fungible tokens (NFTs), which have gained popularity over the last couple of years, will both be included in the VDAs.

Crypto Tax sections in India: What You Need to Know :

Cryptocurrencies and digital tokens have become increasingly popular as investments and trading vehicles. However, the taxation of profits made from these investments is still very unclear. 

Sec 115BBH:

The Indian government has introduced a new tax law that will impose a 30% tax on profits made from “transfer” of cryptocurrencies and digital tokens.

Section 194S: 

Under Section 194S of the Income Tax Act, this new law imposes a 1% tax on the Virtual Digital Assets (VDA) purchased from "resident" sellers in India. The purchaser is required to deduct this tax from the purchase price.

How your crypto assets will be taxed?

1) Crypto Tax :

The Income Tax Department is set to levy a 30 percent I-T plus cess and surcharges on all taxable income from April 1. The move is part of the government's efforts to curb tax evasion and promote financial transparency. Specific Individuals or HUFs required by the I-T Act to have their accounts audited would be subject to the threshold limit of $50,000 a year.

2) Taxation of crypto gifts :

Any payment towards virtual currencies beyond Rs. 10,000 in a year will be treated as taxable income (1% TDS) of the recipient. A tax is also proposed to be applied to gifts of virtual digital assets received by the recipient. The recipient will need to pay tax on such gifts.

3) Losses on crypto assets cannot be Squareoff by gains on them :

According to a government proposal last week, the set off of losses from cryptocurrencies with gains from other virtual digital assets would be prevented. As infrastructure costs incurred while mining crypto assets will not be considered acquisition costs, the government will not allow tax breaks.

To remove 'other' from the section relating to set off of losses from gains in virtual digital assets, the ministry has proposed amending the Finance Bill, 2022.

According to the minister, no allowances or expenses can be deducted when calculating the income from VDA transfers. 

"The (Finance) Bill also proposes to define VDA. If any asset falls within the proposed definition, such virtual asset will be considered as VDA for the purposes of the Act and other provisions of the Act will apply accordingly," Minister of State for Finance Pankaj Chaudhary said.

4) 1% TDS (Tax Deducted at Source) on payment made :

As part of the government's effort to capture transaction details, Tax Deducted at Source (TDS) would be levied over a specified threshold and deducted at 1 percent of such consideration.

Crypto assets are becoming increasingly popular as an investment choice, but the infrastructure costs incurred in mining them will not be treated as a cost of acquisition as per the new rules. This is because crypto assets are classified as capital expenditure and not cost of acquisition. This means that the costs associated with mining these assets will not be deductible when calculating taxable income.

Also Read | New Metamask updates allow iPhone users to buy digital assets with Apply Pay

Pavan A

CBW - External Analyst

INDIA