Overview
The Hon. Finance Minister Mrs. Nirmala Sitharaman has promised radical changes to the virtual asset (Calculate Tax on Cryptocurrency) class in Budget 2022. The government has now formally referred to digital assets, including cryptocurrency holdings, as “virtual digital assets.” These include all forms of cryptocurrency, including Bitcoin, Ethereum, and other digital assets like Non-fungible tokens (NFTs).
These are the considerations that any cryptocurrency investor should bear in mind, even though there are still a lot of discussions that the Indian Government needs to have with the Indian populace regarding the regulations it will set for “Virtual Digital Assets,” in accordance with the Budget 2022 session:
- At the conclusion of each fiscal year, income from the transfer of virtual digital assets like cryptocurrency and NFTs will be subject to a 30% tax.
- When declaring revenue from the transfer of digital assets, there will be no deductions permitted outside the cost of purchase.
- Digital asset losses cannot be offset by any other revenue.
- The recipient of a digital asset gift will be subject to tax. It is not possible to offset losses from one virtual digital currency against profits from another. This list of recommendations should also include the 1% TDS point, which was stated in Budget 2022.
As per the Income-Tax Act of 1961 Section 206AB:
- The tax (TDS) that must be withheld on cryptocurrency-related transactions will be 5% if any user has not filed an income tax return in the preceding two years and the amount of TDS in each of those two years was at least $50,000.
- TDS requirements will be in effect if an order is placed before 1 July 2022, but the trade is performed on or after that date.
Virtual Digital Assets: What Are They?
Let’s quickly review what these crypto-assets are before delving into the taxation and ongoing government discussion around virtual digital assets, also known as crypto assets. Blockchain technology is used to manage decentralized digital assets known as cryptocurrencies, such as Bitcoin and Ethereum. If we go back a few years, the cryptocurrency industry has always been fraught with controversy ever since Satoshi Nakamoto, a mysterious figure, released the Bitcoin Whitepaper to the public in 2009.
Since then, the decentralized aspect of the cryptocurrency field has been explored, and as of today, there are more than 18,000 cryptocurrencies, also known as altcoins, accessible, according to Investopedia.
How is India’s 30% Crypto Tax Calculated?
Calculate Tax on Cryptocurrency – There are no differences between short-term and long-term profits when applying the flat income tax rate to retail investors, traders, or anybody moving cryptocurrency assets in a given fiscal year. Any gains derived through the transfer of virtual assets will be subject to a 30% tax rate. No of the type of income, such as a company or investment income, or the length of the holding term, the 30% cryptocurrency tax rate will always apply.
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Example 1
Calculate Tax on Cryptocurrency: A flat 30% cryptocurrency tax is applied to income gains of ₹ 50,000 if an investment in cryptocurrency of ₹ 1,000,000 was made at the start of FY2022, and ₹ 1,50,00,000 was received from the sale of the cryptocurrency at the end of FY2022. As an investor, you will be required to pay ₹ 15,000 in tax on your cryptocurrency revenue for that fiscal year (plus surcharge and cess).
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Example 2
It should be emphasized that in this case, we are only offsetting losses from the same source of revenue that occurred within the same fiscal year. We are not offsetting losses from earlier periods or losses from any other businesses.
When Does the 30% Tax on Crypto Apply?
Profits generated by using different crypto tokens over the course of a full fiscal year will be netted against the full 30% tax on all crypto assets. Beginning with the FY 2023–24 Assessment, a 30% tax will be imposed.
Can We Avoid India’s 30% Crypto Tax?
No, It is illegal to avoid taxes, and the government’s tax policies on cryptocurrencies are extensive. The goal of cryptocurrency exchanges has been to provide a regulatory-compliant environment where all transactions and investments are documented and transparent to the tax authority.
TDS of 1% on Crypto Assets
The 1% TDS is applied on all sale transactions of the crypto assets, according to the updated Income Tax Regulations. This will go into effect on 1 July 2022. Please be aware, though, that the TDS will be subtracted from the whole selling amount rather than simply the profits. It makes no difference to TDS whether you generate a profit or a loss on your trade. It will always be subtracted.
Is There Any Loss from the Transfer of Virtual Assets Subject To Crypto Tax?
No credit or deduction for virtual assets is permitted for computational purposes (apart from the cost of acquisition). The government has made it clear that any losses incurred as a result of the transfer of virtual assets cannot be offset against other types of revenue.
As an illustration, suppose an assessee suffers a loss of ₹2 Lakhs from cryptocurrency and revenue of ₹10 Lakhs from other enterprises. The assessed will be required to pay income tax in the amount of ₹10 Lakhs since the loss of ₹2 Lakhs cannot be offset against company income. In contrast, even losses from other firms cannot be offset by revenue from cryptocurrency.
Capital Gains are How the Crypto Profits are Classified
Calculate Tax on Cryptocurrency – Profits from cryptocurrency-related transactions that qualify as investments will be counted as capital gains.
What Happens if Capital Losses Occur?
There are still no precise and certain tax-related restrictions in place for situations when your cryptocurrency-related transactions have lost money.
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If classified as an income from a business
The Goods and Services Tax (GST) law’s implications for crypto transactions reported as company revenue must also be considered.
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If treated as business income with GST angle
Anything other than commodities, securities, and money is referred to as “services.” It comprises actions involving the use of money or its conversion into cash or into any other form of payment that requires separate consideration. According to this definition, since the purchase and sale of crypto tokens constitute the supply of goods or services, GST may become relevant.
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If categorically designated as other sources of Income
When filling out ITR forms, crypto assets are also included as “other sources of income.” It is imperative to declare profits in the ITR and pay taxes on them even though the income tax agency has not provided any clarity.
Calculate Tax on Cryptocurrency: How to Plan for the Cryptocurrency Tax Season in India?
Due to a lack of precise clarification, there have been conflicting facts floating around on the internet since the Budget session of 2022. The actions you must take to pay your 30% cryptocurrency tax are listed here to assist in allaying any concerns. At the end of this fiscal year, or in the assessment year of 2023–2024, the tax will be applied.
- Consider all the crypto assets you had before April 2022 as you begin with a clean slate.
- When you sell any of your cryptocurrency holdings, keep track of the ₹ amounts. No cryptocurrency will be used to pay the tax; it will be done in ₹.
- They must submit reports using the appropriate Income Tax Return 1, 2, 3, or 4 form if there are any gains from virtual digital assets.
- Institutions and enterprises are required to submit returns using the appropriate Income Tax Return 5 or 6 form.
Crypto Tax On Gifts Received in the form of Virtual Assets
Any presents given in the form of virtual assets are subject to taxation as well, with the receiver responsible for paying income tax at a fixed rate of 30%. (plus surcharge and cess). This applies to those who provide virtual goods, such as cryptocurrency or NFTs, to friends and family members in India.
What Taxes Apply to Crypto Airdrops in India?
Airdrop in the cryptocurrency sector functions similarly to how businesses taste test new items by delivering samples to retail merchants. Some new tokens or NFTs are airdropped to investors once they are introduced. This may be split into two pieces because it is not a direct investment. First off, the assets that were airdropped will qualify for taxation as “other earnings.” If investors keep the assets after the airdrop event and make a profit from them, they will be subject to the updated 30% cryptocurrency tax.
Do “NFTs” Require the Payment of Taxes?
Take a look just at the scenario if you’re wondering how taxes will be levied on NFTs. NFTs, or Non-Fungible Tokens, are also considered Virtual Digital Assets under the new tax legislation. In other words, if you purchased an NFT and made a profit off of it, that profit will be taxed coupled with a surcharge and a 4% cess.
DEFI Transactions: How Are they Taxed?
Looking more closely, we can see that DeFi taxes will be levied through a number of additional DeFi crypto activities, such as yield farming, crypto mining, crypto lending, and crypto borrowing. There are two different forms of taxation that apply to cryptocurrency mining. The cryptocurrency tokens you earned through mining will be subject to business income tax. The second type appears after you’ve profited from HODLing the cryptocurrency. When you sell the asset, you must then pay the 30% tax.
Conclusion
We suggest that you speak with an expert tax advisor of Vakilsearch that is knowledgeable about cryptocurrencies and taxation procedures so they can assist you in making the best choices and judgments possible so you can go in the correct way.
Although the taxation of cryptocurrency assets has been clarified, the sector is still waiting for a consensus and adequate regulation of cryptocurrencies. The government has stated time and time again that cryptocurrency is illegal, echoing the worries voiced by the RBI.
