India has nearly 15-20 million cryptocurrencies with total holdings of above $5 billion which shows vast interest among cryptocurrency investors. With this rapid growth, several crypto- unicorns are emerging. The estimates also highlight that the possible contribution of digital assets will be at $1.1 trillion by 2032.
In this year's Union Budget 2022, Finance Minister Nirmala Sitharaman announced the proposal declaring cryptocurrencies, non-fungible tokens, and any other asset are under ‘Virtual Digital Assets’ which are now subject to gains tax, which is similar to shares in the stock market.
Even as the VDA tax rate is high, investors are happy with the fact that crypto has gained some recognition by finding a mention in the official Budget document for taxation purposes. However, Finance Minister Nirmala Sitharaman has clarified that the imposition of tax on income from VDAs including cryptocurrency doesn't mean they have been declared legal. While much clarity on the legality of cryptocurrency will come through the upcoming bill to regulate Virtual Digital Assets, a number of cryptocurrency investors are confused about the calculation of their tax liability.
In the Union Budget 2022, it has been proposed to introduce a new Section 115BBH for taxation of persons whose sources of income include income from transfer of VDAs. “The proposed section 115BBH seeks to provide that where the total income of an assessee includes any income from transfer of any Virtual Digital Asset, the income tax payable shall be the aggregate of the amount of income-tax calculated on the income of transfer of any Virtual Digital Asset at the rate of 30% and the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of the income from transfer of Virtual Digital Asset,” Budget 2022 Memorandum said.
The finance bill memo explicitly states that no deduction in respect of any expenditure (other than the cost of acquisition of a digital asset) or allowance or set-off of any loss shall be allowed to the assessee under any provision of the Act while computing income from transfer of Virtual Digital Assets. Cryptocurrency investors cannot set off any loss arising from the transfer of Virtual Digital Assets and such loss will not be allowed to be carried forward to subsequent assessment years. Surpluses will be taxed and losses cannot be used to set off against profits. Those who receive cryptocurrency as gifts will have to pay tax too.
Taxability on Cryptocurrency
When will you have to pay 30% tax on income from cryptocurrency?
According to the Budget document, 30% tax on cryptocurrency and other VDAs would be applicable from Assessment Year 2023-24. That means all your income from cryptocurrency transactions in FY 2022-23 will be taxed at the rate of 30%. Investors can pay tax on income from cryptocurrency and NFTs till the end of FY 2021-22 as per the existing taxation rules.
For example, if one invests ? 1,00,000 in crypto, and sells it at ? 1,25,000. The investor needs to pay the tax on the profit which is ? 25,000 rather than paying tax on the total amount.
This 30 percent tax on profit also takes into account a 1 percent Tax Deducted at Source (TDS) deposited by the facilitator, exchanges, or a person who is responsible for paying the consideration on every cryptocurrency transaction.
Will you have to pay tax on both gains and losses from cryptocurrency?
Losses arising from the transfer of crypto assets cannot be set off against any other income and also cannot be carried forward. However, the loss arising from the transfer of crypto assets can be set off against gain arising from the transfer of crypto assets in the same financial year.
For example, an individual has a salary income of Rs.20 lakh, gain on sale on Bitcoin of ? 5 lakh, and loss on sale on Ethereum of ? 2 lakh. S/he can set off the loss and the net gain from the sale of crypto assets (both Bitcoin and Ethereum) of ? 3 lakh would be subject to tax @30% plus applicable surcharge (nil in this case) and cess (1.2% viz 4% of 30% tax) resulting in an effective tax rate of 31.2%. The salary income of Rs.20 lakh will be subject to tax at the normal tax slabs ranging from 5% to 30% (plus surcharge and cess) and would also depend on whether the assessee has opted for the optional tax regime under section 115BAC of the IT Act or the pre-existing tax slabs. However, any loss incurred because of investments in this asset class cannot be set off against income from any other sources. In other words, if you incur a loss of ? X from investments in crypto and a profit of ? Y in the stock market, you cannot claim that you would pay a tax on ? Y- ? X. On the other hand, if you get a profit of ? X from investments in crypto and a profit of ? Y in the stock market, you will have to pay taxes on both X and Y.
Will you have to pay more than 30% tax on cryptocurrency income?
While further clarity is required from the Government in this regard, experts' views differ on whether a cryptocurrency investor would have to pay just 30% tax or effectively more than that due to surcharges. The effective tax to be paid on income from transfer of cryptocurrencies, NFTs or other Virtual Digital Assets may be more than 30% as this flat rate is exclusive of applicable surcharge and cess.
Will you have to pay tax for holding cryptocurrency?
You will have to pay tax only when you earn an income from transaction, transfer, or exchange of cryptocurrency or other Virtual Digital Assets. No tax is to be paid for holding cryptocurrency, according to the best ca firm in vashi Navi Mumbai.