Well, since Budget 2022 was announced by the Finance Minister of India there is a lot of talk about cryptocurrency and its trading. Today, with the help of our professional experts, we are making a humble attempt to answer one of the most important questions everyone is asking nowadays i.e, “What are the tax implications of cryptocurrency in India?” through this article.
So, without further ado let’s discuss. Happy reading!!
First, let’s discuss the basic questions related to cryptocurrency.
What is Cryptocurrency?
A cryptocurrency can be defined as a form of payment that is used for the exchange of goods and services online. Simply put, cryptocurrency is like a digital currency that is used as a medium of payment like any other traditional currency. It is treated as a digital asset by many people and traded by them in the open market like any other security or asset. A few of the popular cryptocurrencies currently traded in the market are Bitcoin, Ethereum, Ripple, Solana, Dogecoin, Litecoin, and many more.
How do Cryptocurrencies really work?
Cryptocurrencies are based on a technology called Blockchain. Blockchain technology is most simply defined as a decentralized, distributed ledger that records the provenance of a digital asset. Nowadays, many sectors are using blockchain technology, e.g.- automotive, banking, health care, etc. The reason is its high-security USP, which makes blockchain technology safe to use.
What is the legality of Cryptocurrencies in India?
Cryptocurrencies are not considered legal tender in India yet. Even the RBI (Reserve Bank of India) had tried to impose a ban on crypto trading or exchange in India. But in March 2020, the Supreme Court lifted the RBI’s ban on constitutional grounds and allowed the virtual trading of cryptocurrencies in India, which resulted in huge investments made by Indian people in crypto.
Recently, in Budget 2022, the government has made an announcement to introduce Digital Rupee (a digital Indian currency based on blockchain technology), which will be issued by the RBI very soon. Although, there is a lot of ambiguity about whether other world cryptocurrencies will get the status of legal tender in India or not.
We hope that now you all get a fair idea about cryptocurrency. Now, let’s dive deep into the hot topic of the hour “Taxation on Cryptocurrency”.
What are the tax implications of cryptocurrency in India?
● Income Tax implications on cryptocurrency trading.
In Budget 2022, it is announced by the Finance Minister of India, that all the digital assets including cryptocurrencies will be covered under the income tax bracket from now onwards. A new Section 115BBH is introduced for this purpose under the Income Tax Act, 1961 to provide for taxation of income arising from the transfer of virtual digital assets. The provisions of the same are discussed below:-
➢ Virtual digital assets like crypto shall be taxed at a flat rate of 30%.
➢ No deductions will be allowed while computing income from the transfer of digital assets except the cost of acquisition of such digital assets.
➢ Loss arising on the sale of such virtual digital assets cannot be set off against any other income, and such loss will not be allowed to carry forward as well.
➢ TDS shall be levied at the rate of 1% on the payment made for the transfer of virtual digital assets to a resident assessee.
Section 115BBH relating to the taxation of virtual digital assets is effective from 1st April 2022.
Let’s discuss some key issues related to the above provisions.
Is the flat tax rate of 30% on virtual digital assets like crypto inclusive of surcharge and cess?
No, the effective tax to be paid on income from the transfer of cryptocurrencies, NFTs or any other virtual digital assets is 30% plus surcharge and cess. Therefore, in the case of individuals or HUFs, apart from the 30% tax, the applicable surcharge rates of 10%, 15%, 25%, and 37% of the tax amount may be levied depending on the total taxable income and cess may also levy at 4% of the tax and surcharge amount.
Is the set-off of losses related to one crypto asset will be allowed against the capital gains made on the transfer of other crypto assets, during the same financial year?
There is a lot of ambiguity and not much explanation given by the CBDT on this issue yet, but according to the many experts, the set-off of crypto losses against crypto gains in the same financial year is allowed.
“As per the clause (b) of sub-section (2) of Section 15BBH of the Income-tax Act, 1961 provides, no set-off of loss from the transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any other provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.”
It is clear from the above provisions that loss arising on the transfer of virtual digital assets like crypto is not allowed to be either carried forward to the next year or set off against any other income computed under any other provision of the Income Tax Act, 2016 in the same year.
However, another view can also be interpreted from the above provisions that set off of losses related to virtual digital assets is allowed against income computed under the Section 15BBH itself i.e., set off of crypto losses is allowed against crypto gains arising in the same financial year. But to be sure we have to wait for the CBDT clarification on this issue. (Ontaxco recommends this view for the benefit of the assessee)
To give you all more clarity, we have explained how taxes on cryptocurrency are calculated in different scenarios, with the help of the below examples:-
Particulars | Taxable Amount | Tax Payable |
Mr. A, during the FY 2022-23, has made a profit of Rupees 20 lakh on the crypto assets while the losses incurred by him on such cryptocurrency transactions are Rupees 10 lakh. | If Mr. A takes a stand as explained above, then he can set off the losses of Rupees 10 lakh incurred on crypto assets with the income earned during the same financial year of Rupees 20 lakh on crypto assets. | As per the first view, Mr.A is liable to pay flat 30% tax on Rupees 10 lakh. |
What if Mr. A, during the FY 2022-23, has made a profit of Rupees 65 lakh on the crypto assets instead of Rupees 20 lakh? | In this scenario, Mr. A would be liable to pay taxes on his total taxable income of Rupees 55 lakh under Section 15BBH, after adjusting losses of 10 lakh. | As per the first view, the same flat 30% will be levied on Rupees 55 lakh. |
What if Mr. A, during the FY 2022-23, has made a profit of Rupees 1.2 crore on the crypto assets? | In this scenario, Mr. A would be liable to pay taxes on his total taxable income of Rupees 1.1 crore under Section 15BBH, after adjusting losses of 10 lakh. | As per the first view, the same flat 30% will be levied on Rupees 1.1 crore. |
- Goods and Service Tax (GST) implications on cryptocurrency trading.
