Cryptocurrency Taxed at 30% from April 1, 2022: Everything You Need to Know
India is implementing a 30 percent tax rate on income from virtual digital assets, such as cryptocurrency and NFT. For this purpose, section 115BBH has been inserted into the Income-tax Act, 1961. While the taxation will be effective from April 1, 2022, cryptocurrency transactions for the previous fiscal year (FY 2021-22 period) will also be taxed. Other tax implications on virtual digital assets (VDA) include one percent TDS on transfers, no basic exemptions, no set-off on losses, no indexation benefits irrespective of the holding period, and taxation of gifts.
After much uncertainty about the tax implications of dealing in cryptocurrencies in India, the Federal Government finally announced a blanket tax of 30 percent on income from virtual digital assets in the Union Budget 2022-23. For this purpose, a new section 115BBH has been inserted into the Income-tax Act, 1961.
Although such taxation will be effective from April 1, 2022, cryptocurrency transactions for the previous fiscal year (FY 2021-22 period) will also be taxed.
The virtual digital assets attracting the new tax liability include crypto assets like Bitcoin, Dogecoin, etc., Non-Fungible Tokens (NFTs), and any such assets that might be developed in the future. With this move, the government has brought the taxation of digital assets at par with activities like horse racing and lotteries.
It must be noted that merely taxing cryptocurrency assets does not make them legal in India. The government has clarified that a law regulating virtual digital assets will be introduced in India – but after a global consensus emerges on their regulation. As reported by The Economic Times, the government is not planning on introducing the law anytime soon.
Tax on cryptocurrency in India: Key pointers
Here is a breakdown of relevant rules and points to be kept in mind regarding cryptocurrency taxation in India.
30 percent tax payable on cryptocurrency assets sold at a profit
Applicable from April 1, 2022, any gains made from the sale of crypto assets will be taxed at 30 percent. For instance, if an investor buys crypto assets worth INR 40,000 and sells them for INR 50,000, generating a profit of INR 10,000, they must pay a 30 percent tax of INR 3000.
Taxing these assets at such a high rate is deemed extremely aggressive by industry stakeholders, when compared with other assets. In India, gains from stocks and equity funds are taxed at 10-15 percent and non-equity options, property, and gold are taxed at 20 percent or at marginal rate.
Industry watchers note that the high tax rate will not affect large investors, who were already in the 30 percent tax bracket. Instead, it will impact smaller players and students, who were enjoying tax free returns on crypto investments until now.
According to the crypto research and intelligence business firm CREBACO, over 105 million people, which is 7.90 percent of India’s total population, currently own cryptocurrency, with total assets worth over US$10 billion.
One percent TDS on transfers
Applicable from July 1, 2022, there will be one percent tax deducted at source (TDS) in case of a resident seller for the transfer of virtual digital assets. For this to be implemented, necessary amendments will be made under section 194S of the Income-tax Act. This one percent TDS will be deducted irrespective of gain or loss.
For example: An investor buys a digital asset worth INR 10,000 and sells it a year later at a loss for INR 5,000. When the investor withdraws INR 5,000 from their bank account, they will receive INR 4,950 after deduction of one percent TDS.
Although this deduction gets adjusted against the total liability and can be claimed as refund later while filing tax returns, stakeholders complain that the provision locks up liquidity and traders, who indulge in frequent buying and selling of such assets will be largely hit. For example, if a trader trades 300 times in a year, their entire capital could get locked up in TDS.
This provision is deemed as the most problematic for various reasons. Apart from locking up capital and increasing unnecessary compliance requirements, it has not been clarified as to what constitutes transfers. Cryptos are not just bought and sold but also transacted through airdrops, forking, staking, P2P lending, and wallet transfers. They can also be used for utility payments in return for goods and services. The government needs to clarify whether all these modes of transfer will also constitute “transfer for the purpose of TDS deduction”.
The Union Budget 2022-23 states that the onus of deducting TDS and depositing it will be on the buyer. However, due to logistical difficulties like unavailability of seller data like PAN etc. with the buyer, this responsibility might fall with the exchanges.
No basic exemptions or deductions
No deduction towards any expenditure, except cost of acquisition, will be permissible while paying tax on virtual digital assets in India.
Similarly, no exemptions will be considered while taxing the individual making gains from transfer of such assets, irrespective of their income levels, or age. This is regressive when compared to the taxation of capital gains, which are tax free up to INR 1,00,000.
Losses from virtual digital assets can’t be set-off
Unlike assets like equity, property, gold, and debt funds, where losses can be set off against gains from other assets and unadjusted losses can be carried forward for up to eight financial years, crypto assets have no such benefits. Losses from these crypto assets cannot be set off against gains from other assets. Further, these losses can’t even be carried forward to subsequent years. This move is very discouraging and will dissuade most investors from investing in crypto and other such assets.
No indexation benefits irrespective of holding period
Indexation accounts for the inflation during the holding period and accordingly adjusts the acquisition price upwards, reducing the tax liability of the investors. In case of a loss, a holder of an asset can even claim a loss if the inflation rate is higher than the return on investment. Such indexation benefits are available to asset classes like gold, property, debt funds, depending on the holding period.
However, no such benefits are extendable to virtual digital assets, irrespective of the holding period.
Tax on gifts
Crypto assets acquired either as gifts or through inheritance will be taxed at 30 percent, irrespective of the income level of the recipient.
Regressive provisions, detrimental to industry
Stakeholders have flagged these tax provisions as aggressive, regressive, and detrimental to investor sentiment.
The Indian government has implemented a “stick policy”, with no “carrots”. For instance, instead of encouraging investors to hold such investments for longer periods through measures like indexation, the government is penalizing frequent traders through the one percent TDS rule.
Industry observers fear that such a move will force the industry to either go underground, or move base out of India to countries like Thailand, UAE, and Japan, which have reduced their tax rates to become cryptocurrency hubs.
Digitization and technology will define every aspect of the economy going forward, and if India does not provide a conducive environment to incubate such innovations through facilitative governance, it might lose out on major businesses and investments.
India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to firstname.lastname@example.org for more support on doing business in in India.
We also maintain offices or have alliance partners assisting foreign investors in Indonesia, Singapore, Vietnam, Philippines, Malaysia, Thailand, Italy, Germany, and the United States, in addition to practices in Bangladesh and Russia.