Tax implications on crypto currency in India/ Virtual Digital assets

Newsletter for readers.

A Virtual Digital Asset (hereinafter referred to as "VDA") has been defined as any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration. Such VDAs include "crypto products" and non-fungible tokens (NFTs).

Non-fungible tokens can digitally represent any asset, including online-only assets like digital artwork and real assets such as real estate. Other examples of the assets that NFTs can represent include in-game items like avatars, digital and non-digital collectibles, domain names, and event ticket.

Some of the examples of Crypto products Bitcoin, Dogecoin, Ripple, Ethereum, Sandbox, SHIB IN etc.

Tax on VDA in India: Key pointers

Here is a breakdown of relevant rules and points to be kept in mind regarding cryptocurrency taxation in India.

2. 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. This tax rate imposed on cryptocurrencies/VDAs is intentionally higher than the tax rates imposed on stocks and mutual funds.

Example: 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.

3. One percent TDS on transfer

Applicable from July 1, 2022, One percent tax deducted at source (TDS) will be charged in case of a resident seller for the transfer of virtual digital assets. TDS will be deducted 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 4,000. When the investor withdraws INR 6,000 from their bank account, they will receive INR 5,940 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.

4. 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.

5. 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.

6. 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. 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.

7. 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.