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Crypto Taxation Guide Budget 2022: 30% Tax on Digital Assets

 

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Snapshot: 

  • Budget 2022 Tax Regime on Virtual Digital Assets 
  • Crypto Taxation Explained (with examples)
  • Income Tax on any Gifts in the form of Virtual Assets
  • Crypto Taxation on any Loss from Transfer of Digital Assets
  • Understanding 1% TDS on Crypto Assets (with examples)

Budget 2022 Crypto Tax Update: 30% on All Digital Assets + 1% TDS

In Budget 2022, the Hon’ble Finance Minister Mrs. Nirmala Sitharaman has announced revolutionary changes to the virtual asset class. For the first time, the government has officially termed digital assets including crypto assets under “Virtual Digital Assets. These comprise all the cryptos such as Bitcoin, Ethereum, etc, and other digital assets such as Non-fungible tokens (NFTs). 

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The government has announced a flat 30% income tax rate on the transfer of “crypto assets” in the proposed tax regime. This is a major step by the government in providing clarity to investors and entrepreneurs transacting in digital assets in India and is a step in the right direction towards regulating the crypto industry. 

Transactions in digital assets have increased exponentially over the past few years. There are more than 20 million crypto investors in India, as per industry estimates, with total crypto holdings of INR 40,000 crore approximately. Considering the magnitude and frequency of these transactions, the government has proposed the following specific tax regime for the industry: 

  •  Income from transfer of any virtual digital asset to be taxed at the rate of 30 per cent,
  • TDS of 1 per cent to be charged on payments made for transfer of virtual assets, above a certain monetary threshold, 
  •  The gift of virtual digital assets is proposed to be taxed in the hands of the recipient.

The proposed income tax is applicable from 1st April 2022 and the TDS of 1% is applicable from 1st July 2022, to be effective from financial year FY 2022-23 onwards. 

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How will Budget 2022 Crypto Taxation work?

The flat income tax rate is applicable to retail investors, traders, or anyone transferring crypto assets in a given financial year with no distinctions between short-term and long-term gains. 30% tax rate will be levied on any profits made from transfer of virtual assets. The tax rate will be the same irrespective of the nature of income i.e. it does not matter if it is an investment income or business income and is irrespective of the holding period. 

Example  1

If an investment of INR 1,00,000 was made in crypto at the beginning of FY2022, and by the end of FY2022, the crypto was sold for INR 1,50,000, a flat 30% tax rate is applicable on income gain of INR 50,000. As an investor, you will be liable to pay INR 15,000 (plus surcharge and cess) as tax on crypto income in that financial year. 

It should be noted that any income arising on transactions relating to crypto shall be taxed only at the time of transfer of such crypto i.e. if a person continues to hold the asset, the holding is not taxable on such unrealized gains. 

Example 2

Following are the transactions undertaken during FY 2022-23  

Transaction 1: Bitcoin bought for Rs 5 Lakh and sold for Rs 6 Lakhs

Transaction 2: Ethereum bought for Rs 2 Lakhs and sold for Rs 1.5 Lakhs 

Net income from the above transactions shall be Rs 50,000 [Rs 1 lakhs (income from Transaction 1) – less 50,000 (loss in Transaction 2)] 

Tax on Crypto income for FY 2022-23: 30% of Rs 50,000 = Rs 15,000 (plus surcharge and cess).

Crypto Taxation on any Gifts in the form Virtual Assets

Any gifts made in the form of virtual assets will also be taxed and the recipient of the gift is liable to pay income tax at a flat rate of 30% (plus surcharge and cess). This is applicable to people gifting virtual assets such as cryptos or NFTs to friends and family in India. 

Crypto Taxation on any Loss from Transfer of Virtual Assets

For computational purposes, there is no deduction (other than the cost of acquisition) allowed against any expenditure or allowance for virtual assets. The government has clarified that if one incurs any loss from the transfer of virtual assets, it cannot be set off against any other income. 

For example, if an assessee has a loss of Rs 2 Lacs from crypto and Rs 10 Lacs income from other businesses. This loss of 2 Lacs cannot be set off against the business income and the assessee will be liable to pay income tax on 10 Lacs. Conversely, even losses from other businesses cannot be set off against income from Crypto.  

Moreover, it has been clarified that any loss from the transfer of crypto will not be allowed to carry forward to the next financial year. 

For example, if a user incurs a net loss of Rs 2 Lacs on the transfer of crypto during the year, his/her tax liability on crypto transfer will be zero for the current year but this loss of Rs 2 Lacs cannot be carried forward to the next financial year for adjusting against the future income in the following financial year. In effect, the loss of Rs 2 Lacs will not yield any benefit to the assessee in future tax periods when he/she generates taxable income from the crypto business.  

1% TDS on Crypto Assets  

The TDS of 1% has been introduced to capture the transaction details and keep a track of investments being made in crypto assets.. So, every time you purchase a crypto asset (subject to a certain threshold), you are liable to deduct 1% TDS of the transaction amount in the financial year. 

Many countries around the world have provided clear guidelines on the taxation of crypto assets, and also classified the asset class, for example, the US has classified it under “property” while the UK taxes crypto under “capital gains” tax. Although there are specific questions that require more clarity on the proposed tax regime on virtual assets in India, the government has taken a progressive step further to provide transparency in recognizing crypto assets. The next step in embracing the industry should be to regulate the industry through a crypto bill for further clarity to investors and entrepreneurs.

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