When mutual funds were introduced in the Indian markets, they had generated great interest among the Indian investors which continues to date. Similarly, when cryptocurrency was introduced to the world, it was the next big thing, and investors have been lining up to take part in the initial buzz to maximize their wealth in the long term. Indians too have not been left behind and have invested in crypto. But like every investment, an important point of consideration is its taxation. India did not have clear guidelines for taxation on cryptocurrency till date. But this has been changed post the budget of FY 22-23.
Given below are the details of the recent amendments in the Income Tax Act regarding the taxation of crypto and its impact on investors.
What is cryptocurrency?
Before we talk about the taxation of cryptocurrencies, let us first understand the meaning of the term cryptocurrencies. Cryptocurrency is essentially a digital or a virtual asset which can be invested through a digital platform. Such digital platforms can be used to buy, sell, or trade in cryptocurrencies.
When an investor invests in any cryptocurrency, it is stored in a digital wallet and the investors have a private key to access it. This digital asset ins in the form of a unique code cannot be copied and the ownership is also stored on a blockchain that is independent and cannot be altered. This makes it quite safe and transparent for the investors. Cryptocurrency, although traded and invested by many Indians, does not have any legal tender in India. It is also an extremely volatile asset and hence, investment in it has to be done after thorough research and analysis.
What is included in the government’s definition of “virtual digital assets”?
Broadly, it includes all types of crypto assets or currencies, like:
- Ready money like Bitcoin
- Security tokens like Exodus
- Hush or privacy coins like Monero
- Algorithmic stablecoins like Frax
- Open Blockchain Tokens like Wrapped Asset Token
- Public Blockchain natives like Ether
- Application coins like Filecoin
- Non-Fungible Tokens like Crypto Kitties
- Governance tokens like Uniswap
- Asset-backed tokens like Tether
- Lending or Borrowing cryptos like Aave
What is the tax treatment for crypto as per the budget of FY 22-23?
Investors expected the news about clarity in the taxation of cryptocurrency in the budget of FY 22-23 and it was delivered by Finance Minister Nirmala Sitharaman. The budget of FY 22-23 has formalized the tax treatment for investment in cryptocurrency which will be implemented from 1st April 2022.
A new section 115BBH was introduced in the Income Tax Act 1961 for levy of tax on virtual assets. This section talks about the treatment of the cryptocurrency as a digital or a virtual asset and considers any gains from this asset to be treated in line with any winnings from horse races or lottery winnings. The details of this section and the tax treatment on crypto are explained hereunder.
Gains taxed at 30%
The first and foremost impact of this section is that any gains arising from the sale of cryptocurrency will be taxed at the flat rate of 30%. This is similar to the taxation of lottery winnings, winnings from horse races, or gambling. The taxation of cryptocurrency was long overdue given the rising magnitude of these digital transactions and the move was welcomed by the crypto industry in the form of no negative impact on the prices of the popular cryptos.
This taxation of 30% is at a flat rate without the benefit of any deduction or exemption as in the case of other incomes like business income or capital gains.
No carry forward or set-off of losses
Another important provision under this sedition is that there will be no set-off or carry forward of losses from cryptocurrency. This implies that the investors will not get the benefit of setting off their losses against any income in the current year or carrying them forward for 8 years like any other income (Business Income, loss on sale of capital asset, etc.). The law is clear on the provision that set-off and carry forward of losses arising from crypto cannot be settled across any other gains. However, it does not mention if loss from one digital asset can be set off against profit from another in the same financial year. Most experts believe it to be valid but further clarification from the Government and CBDT is awaited.
TDS at 1%
The government also proposed to levy TDS at 1% on all transactions of virtual digital assets. This move was introduced to monitor all digital transactions. According to this provision, TDS will be deducted by the buyer at the rate of 1% and deposited with the Tax department in the name of the seller. TDS will be implemented on all transactions beyond the specified limit of transactions involving digital assets.
What is the current tax treatment of cryptos?
The amendment in the budget of FY 22-23 only removes the ambiguity around the tax treatment of the cryptocurrency. These were always considered as assets and subject to taxation. Before this amendment, cryptos were treated as capital assets or stock in trade based on their volume and intent of investment. This tax treatment was similar to stocks and other similar securities. Accordingly, if an investor has simply invested in cryptocurrency without any intention of trading in them, any gains from the sale of such assets were treated as LTCG or STCG based on their period of holding.
On the other hand, if these virtual assets were traded like stocks and other securities in speculation, these assets were treated as stock in trade, and any gains were treated as business income. This implied that any expenses incurred for these assets were allowed as a deduction and the gains were taxed based on the applicable slab rates of the taxpayer.
Is the amendment beneficial for the taxpayers?
The amendment in the taxation of cryptocurrency is welcomed by the investors of digital assets. However, the tax treatment proposed by the government is quite surprising. The treatment of crypto gains in line with lottery winnings and its classification as under the highest income tax bracket is seen as a clear message from the government that it does not encourage crypto investments because of the risks associated with it.
Furthermore, the government has not yet legalized cryptocurrency in India but has informed that they will soon launch a nationalized digital currency.
Since the government is not clear about the tax treatment of crypto gains in the current financial year, taxpayers have an option for the treatment of such income in FY 21-22. They can either treat the gains in line with the mandate from FY 22-23 or treat it as business income or capital gains based on their intention of holding and period of holding. In the former case, the tax levied will be at the rate of 30% as per the provisions of section 115BBH. Most experts believe the similar tax treatment will be beneficial as it will avoid any future litigation.
On the other hand, as nothing is explicitly mentioned, taxpayers can treat their current gains as capital gains and pay LTCG at 20% with the benefit of indexation (10% without indexation). STCG in this case will be taxed as per the applicable tax rates of the taxpayers. If the taxpayers are in lower taxable categories they can save tax on their gains. Taxpayers that are in the highest tax bracket will not have any benefit on account of the same tax rate of 30%. Similarly, treating the current gains from cryptos as business income will provide the benefit of deduction of expenses from the gross income which will not be permissible from FY 22-23.
The announcement of taxation on crypto gains has removed any ambiguity and streamlined the tax treatment of these gains by all Indian investors. This is considered as a step towards legalizing the use of crypto and being in sync with the growing use of digital currency around the world.
Yes. Cryptocurrency when given as a gift to a person is also covered under the ambit of taxation and will also be subject to TDS at the rate of 1%.
The budget of FY 22-23 has levied the highest tax rate on cryptocurrency which is 30% of the gains from cryptos or similar digital assets.
Yes. Like any other income, gains from any digital assets are subject to cess at the rate of 4% as well as a surcharge.
In India, cryptocurrency is treated in line with lottery winnings as per the new section introduced in the budget of FY 22-23. In other countries like USA and UK, gains from cryptocurrency are treated as capital gains. Countries like Bermuda and Germany, on the other hand, are considered as a tax haven for cryptocurrency. However, in Germany, any gains on any crypto held for more than a year are considered to be tax-free and if sold within 12 months, gains up to 600 euros are tax-free.