What investors need to know about India’s new cryptocurrency tax
What is cryptocurrency?
In simple terms, cryptocurrencies are digital currencies comparable to our other commonly used currencies that are used to purchase goods and services. However, it has been a point of conflict from its beginning due to its decentralized nature, which means it functions without the influence of banks, financial institutions, or central authorities.
Today, the digital currency world trades over 1,500 virtual currencies, including Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, and Matic. Since the nationwide lockdown, the amount of money invested in and traded in cryptocurrencies has multiplied several times over. Despite the absence of specific regulation from the Indian government or Reserve Bank of India, crypto investments have surged.
Is crypto a form of ‘currency’ or an ‘asset’?
Tax experts have been debating whether to classify cryptocurrencies as a ‘currency’ or an ‘asset. The terms “cryptocurrency” and “crypto-assets” are often used similarly.
However, defining it as a ‘currency’ requires government support; in the absence of such support, it is prudent to describe it as an ‘asset/property.
Given that the tax implications would exist regardless of their legal status, designating them as ‘assets’ would be a more prudent approach than any official explanation.
Additionally, the US government issued a letter defining it as a ‘property’ and imposing capital gain taxes on profits on cryptocurrency sales.
In India, Finance Minister Nirmala Sitharaman introduced the Union Budget 2022, which includes several policy revisions. One of these suggestions is a tax on digital assets such as bitcoins. In the Union Budget 2022, Nirmala Sitharaman said that “any income generated from the transfer of any virtual digital asset shall be taxed at a 30% rate” in the Union Budget 2022.
All cryptocurrency profits earned throughout the year will be taxed at 30%. This is the highest tax bracket – the same as for lottery and game show wins.
From April 1, all types of virtual digital assets (VDAs) or cryptocurrency assets that are sold for a profit are subject to a 30% tax.
While the high crypto tax rate has increased the profitability of stock trading (which is taxed at a maximum rate of 15%), it has also raised many concerns among investors.
The following are commonly asked questions about the proposed crypto tax.
What will be the tax rules for crypto assets?
There is a direct tax provision on cryptocurrency profit. As previously stated, any cryptocurrency profits earned throughout the year would be taxed at 30% – the highest tax level. Therefore, if you purchase a crypto asset for Rs 100,000 and sell it for Rs 200,000, you will be required to pay a 30% tax on the Rs 100,000 profit which will be around Rs 30,000.
Will cryptocurrency investments be taxed as well?
No. The government has only imposed taxes on cryptocurrency’s income and profit. Returning to the previous example, if you purchase a crypto asset for Rs 100,000 and sell it for Rs 200,000, you would pay 30% tax on the profit (Rs 100,000), not on the full investment.
Will cryptocurrency transactions be subject to taxation?
Yes. All cryptocurrency transactions will be subject to a 1% tax at source (TDS). The cumulative TDS, on the other hand, maybe deducted from the total income tax payable at the end of the year.
TDS will be cut even if there is a loss?
Yes, even if one bears a loss, the TDS is taken from the total amount of the crypto transaction. Thus, even if you sell a crypto asset for Rs 500,000 and lose Rs 10,000 you would still be required to pay the 1% TDS on the whole transaction — Rs 500.
Is it possible to avoid paying taxes by trading on foreign exchanges?
Possibly, although it might be considered criminal by authorities as tax avoidance. It is your responsibility to tell the authorities of your cryptocurrency trading income/profit. If you fail to do so and law enforcement authorities learn of it, If you don’t do it and the law enforcement agencies find out, they are likely to come after you.
Can I offset cryptocurrency losses with cryptocurrency profits?
No. You will be required to pay a 30% tax on any cryptocurrency transactions in which you make a profit, and any prior losses will be disregarded. For example, if you earn Rs 100,000 in a Bitcoin transaction but lose Rs 150,000 in a Dogecoin transaction, you would still owe 30% tax on the Rs 100,000 profit. You will not be permitted to avoid paying tax on the first transaction on the grounds that you lost money on the second transaction.
Is there crypto legislation in place?
No. While the central government has enforced a 30% tax on cryptocurrency profit, India has yet to pass a crypto policy. There are no regulations in place for digital assets in the nation despite a tax being imposed on crypto transactions and allowing the government to monitor them.
Does India’s crypto tax make digital currencies legal tender?
No. In the Budget, Finance Minister Nirmala Sitharaman clarified that all cryptocurrencies would be considered digital assets, not legal currency. She stated that only the Reserve Bank of India’s digital money would be recognized as the currency. Thus, you may invest in cryptocurrencies and benefit from their transactions, but you cannot use cryptocurrencies to purchase goods in India.
When will the tax take effect?
The laws relating to 1% TDS take effect on July 1, 2022, whereas profits are taxed starting April 1.
Are cryptocurrency gifts taxable?
Cryptocurrency received as a gift is taxable: If you get a present in the form of crypto or another virtual digital asset, it will be taxed as a gift after the implementation of Budget 2022.
Is there any tax deduction or adjustment based on spending or allowance?
Finance Minister Nirmala Sitharaman said that the policy will exclude deductions for any expenditure or allowance other than the cost of purchase when calculating such income.