How would the new cryptocurrency tax work?
While some experts believe the proposals will not receive equal appreciation from all industry stakeholders, others say it paves the way for a formal set of regulations for crypto assets in the future. .
The Finance Bill 2022 has, for the first time, provided a definition of crypto assets. According to the government, any information or code or number or token generated by cryptographic or other means, providing a digital representation of value exchanged with or without consideration that can be transferred, stored or exchanged electronically can be defined as “virtual digital assets » .
“There has been a phenomenal increase in virtual digital asset transactions. The scale and frequency of these transactions have made it imperative to provide for a specific tax regime,” Finance Minister Nirmala Sitharaman said in her speech.
Essentially, the finance bill provided a definition of virtual digital assets, broad enough to cover emerging digital assets, including non-fungible tokens (NFTs), assets in the metaverse, digital currencies and tokens, among others.
However, which could be said to be negative for crypto investors, the government has proposed that no deductions for expenses or allowances be allowed when calculating income, except for the cost of acquisition. Also, investors cannot deduct losses incurred when transferring digital assets from any other income.
Pratik Gauri, co-founder and CEO of 5ire, a blockchain network, said taxing income from digital assets at 30% might discourage some investors because at first glance it looks harsh.
While crypto investors will not be able to offset losses on other assets, Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co., said a one-to-one correlation could be drawn between the selling and buying of each cryptocurrency within the same fiscal year.
This means that losses in bitcoin can be offset by gains in ethereum in the same financial year while evaluating the gains. Investors were also concerned that the 1% TDS on the transfer of digital assets could lead to taxation on the transfer of funds from an exchange to a wallet. In the field of cryptography, a bitcoin is stored in digital wallets, which are software. Bitcoin wallets are like an online bank account where you keep your tokens.
According to Naveen Wadhwa, Deputy Managing Director of Taxmann, movements of cryptocurrencies between its own wallets will not be considered a transfer. “Thus, no capital gain will be generated and no tax should be deducted,” Wadhwa added.
Sitharaman said the 1% TDS on the transfer of these assets was created to capture the transaction details of virtual digital assets.
However, in this case, a limit of ₹50,000 will be applied if the person paying the consideration is an individual or Hindu undivided family (HUF) and not engaged in any business or profession or if engaged, annual turnover or gross income do not exceed ₹1 crore in case of business or ₹50 lakh in the case of a professional.
In addition, an applicable surcharge and tax ranging from 10% to 37% may apply to the proposed tax rate of 30% on income from the transfer of cryptocurrencies. Tax experts are also of the opinion that TDS will be deducted if crypto is used for payment for services.
For example, TDS will be deducted if you buy a pizza and the overall value of the consideration is ₹10,000 and the pizza seller is not an individual or a HUF. This limit is increased to ₹50,000 if the pizza seller is an individual or a HUF and other conditions are also met,” Wadhwa said.
Additionally, in her budget speech, the Minister of Finance proposed that the gift of virtual digital assets be taxed in the hands of the recipient.
In this case, the existing tax rules for donations will apply. This means that a donation exceeding ₹50,000 per year will be taxed in the hands of a recipient, and the gift will be taxed at the recipient’s applicable slab rate.
However, some close relatives are exempt from this rule. These parents are, among others, brother/sister; spouse; spouse’s brother/sister; brother/sister of one of the parents; ascending or descending in a straight line; direct ascendant or descendant of the natural person’s spouse; as well as the spouse of the persons referred to here.
While crypto experts are of the view that the government has officially recognized the legality of crypto in India, tax experts believe that the recognition of digital assets under income tax is not akin to the legality of crypto. grant of legal status.
“It is a very smart move that without getting into the classification issues of treating crypto assets as a commodity, asset or currency, the government has put in place an independent regime, taxing crypto earnings at a rate flat rate of 30%,” Singhania said.
However, according to L. Badri Narayanan, Executive Partner, Lakshmikumaran & Sridharan Attorneys, the new crypto tax seems to have a chilling effect on investor interest and is very similar to gambling taxation.
Furthermore, Jay Hao, CEO of OKX.com, believes that taxing profits from crypto assets at 30% may discourage investors from choosing crypto as an investment avenue and delay the mass adoption of crypto assets in India. .
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