New Cryptocurrency Tax Rules in India: Everything You Need To Know

In India, does crypto currency have to be taxed? Do you want to know how the Indian Income Tax Department (ITD) feels about Bitcoin and other cryptocurrencies? Currently, there is no regulation of cryptocurrencies or non-fungible tokens (NFTs) in India. In this article, we will talk about the New Cryptocurrency Tax Rules in India.

Quick Look

Is Cryptocurrency taxed in India? In India, Cryptocurrencies are indeed taxed.

Prior to 2022, neither the categorization of crypto assets nor the ensuing taxation of Bitcoin and other cryptocurrencies had an official stance from the Indian government. But lately, the Indian government officially recognized cryptocurrencies as legal tender by designating them as Virtual Digital Assets (VDAs) and establishing a taxation framework for VDAs, often known as crypto.

Although there have been rumors of a complete cryptocurrency bill, none of these have been made public, and it is still unknown how the Indian government would handle cryptocurrencies. There doesn’t seem to be any current effort to substantively regulate NFTs. A new tax framework has been put in place to tax gains and/or income from virtual digital assets (VDAs), which include cryptocurrencies, NFTs, and similar tokens, as well as other assets that the government may designate, while it continues to consider its position on cryptocurrencies and NFTs.

As a result, under the Income Tax Act, of 1961, there is now a tax of 30% plus a surcharge and cess on the transfer of any VDA, such as Bitcoin or Ethereum. But it’s still unclear how cryptocurrencies are viewed legally.

Let us first understand about Virtual Digital Assets before examining the tax regulations governing cryptocurrencies.

Meaning of Virtual Digital Assets

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.

In India, how is Cryptocurrency taxed?

The phrase “Virtual Digital Assets” is defined under Section 2(47A) of the Income Tax Act, 1961 by the Income Tax Department. The definition goes into great length, but in essence, it includes all types of crypto assets, such as cryptocurrencies, NFTs, tokens, and more.

The finance minister included Section 115 (BBH) in the 2022 budget. On gains obtained from trading cryptocurrencies on or after April 1, 2022, this clause imposes a 30% tax (plus any relevant surcharge and 4% cess).

The highest income tax band in India is equal to this rate (excluding surcharge and cess). Private investors, professional traders, and anybody else who transfers digital assets throughout a particular fiscal year are subject to the tax rate. Additionally, the 30% tax rate will be applicable regardless of the type of income; hence, there is no distinction between income from investments and revenue from businesses, nor is there one between short-term and long-term profits.

Cryptocurrency is subject to other taxes than the 30% levy. To guarantee that all cryptocurrency transactions are recorded, another section, 194 (S), imposes a 1% Tax Deducted at Source (TDS) on the transfer of cryptocurrency assets on or after July 1, 2022, if cryptocurrency transactions reach Rs. 50,000 in a fiscal year (or Rs. 10,000 in certain circumstances).

However, there are still concerns for both investors and accountants. Before the FY 2022–2023, the Income Tax Department has not made it clear how cryptocurrency revenue would be taxed. When submitting their return for FY 2021–22, taxpayers have the option of declaring income as capital gains if assets are held for investment purposes or as business income if assets are held for trading purposes.

The Income Tax Return for FY 2021–2022 is due on July 31, 2022, and a late return may be filed through December 31, 2022. (For non-audit cases).

New Cryptocurrency Tax Rules in India

Cryptocurrencies were to be included as virtual digital assets in the Union Budget 2022. (VDA). Cryptocurrencies are classified as assets, but their tax classification differs from that of traditional assets. A person is required to pay a flat 30 percent tax under the new crypto tax law on revenue derived from the transfer of cryptocurrencies and other virtual digital assets, such as NFTs.

According to Experts, the taxpayer is only permitted to deduct the cost of purchase from the sale price of a crypto asset. The cost of the mining infrastructure would not be factored into the purchase cost calculation, the government recently stated.

• Losses cannot be set off in any way: Losses cannot be adjusted within a single head, i.e., they cannot be offset against revenue from another VDA. Experts explained this by saying that you cannot deduct the loss on the transfer of NFTs from the profit on the transfer of Bitcoin if you suffered a loss on the transfer of Bitcoin. Your tax obligation for NFT transfer earnings is a fixed rate of 30%. Additionally, losses from cryptocurrency transfers cannot be offset by earnings under any other heading. This implies that losses from cryptocurrency cannot be offset by gains from the sale of stocks, mutual funds, assets like real estate, etc.

• No carry forward is permitted: The taxpayer is prohibited from carrying forward bitcoin losses under the crypto tax rules. You cannot carry forward a loss from the transfer of cryptocurrency to the following fiscal year to set off profits in the future.

• When Will the 30% Crypto Tax Become Due?: From Assessment Year 2023–2024, the taxpayer will be required to pay a 30% tax on cryptocurrencies and other VDAs. Your whole VDA transfer revenue for the upcoming fiscal year (2022–2023) will thus be subject to a 30% tax rate.
  Crypto investors, according to experts, should determine their Advance Tax burden after taking into account the tax on revenue from the transfer of cryptocurrencies and NFTs and pay the advance tax installments in accordance with that calculation.

• Tax on Cryptocurrency Exchange in Business Transactions: Virtual digital assets (VDA), as defined by the government, are not money.  However, unlike how it is defined for capital assets in the Income Tax Act, of 1961 the term “transfer” is not defined in reference to virtual digital assets. The definition of “transfer” and whether such transactions fall under the purview of the legislation must be clarified.
  The TDS provision will apply if the legislation confirms that such transactions are within the term of “transfer.” As a result of the transfer taking place, the individual transferring the cryptocurrency will be compelled to deduct TDS. In the hands of the person transferring the cryptocurrency, such an occurrence will be taxed.
  Additionally, the company will be obliged to disclose receipts based on the Fair Market Value (FMV) of cryptocurrency accepted in payment for products or services. A transfer of cryptocurrency will occur if the company sells or otherwise transfers these digital currencies, and tax will need to be paid on such transfers.

• Taxes on cryptocurrency, NFT Airdrops, or Gaming Coins: Companies in the crypto and NFT sectors frequently employ airdrops to publicize the beginning of their projects. Similar to getting a coupon with a discount code in your mailbox, airdrops work similarly.
  According to the framework of the Income Tax Act, of 1961, such crypto airdrops or coins obtained through gambling may be regarded as gifts, and as such, they are taxable in the recipient’s hands.

• Tax on Crypto Gift Received: The definition of “specified moveable assets” has also been enlarged by the government to include “virtual digital assets.” As a result, gifts received in the form of cryptocurrency assets would be subject to taxation if their fair market value exceeded Rs 50,000.
  However, a gift received from family members or on particular occasions would be excluded from tax, according to a clear interpretation of the crypto tax regulations.

Cryptocurrency Tax Rules: Applicability of GST

The government has not yet addressed the issue of whether cryptocurrencies are subject to taxation under the Central Goods and Services Act, of 2017.

Cryptocurrency Tax Rules: Classification under GST

Let us look into the classification of cryptocurrency under the GST Regime:

• If Cryptocurrency is to be considered “money” for the purposes of GST?: It appears to be money when looking at its properties, such as store of value and unit of account. However, according to the CGST Act, 2017, “money” only refers to legal tender or foreign currency accepted by the RBI. As such, because it does not meet these requirements, it will not be regarded as money.

• If Cryptocurrencies are to be categorized under the GST as “Securities”?: Securities are defined under The CGST Act, 2017 to have the same meaning as that given to them by The Securities Contracts (Regulation) Act, 1956. Following a review of that definition as well, it is determined that cryptocurrencies do not fit within the category of “securities.”

• Whether or not to classify cryptocurrencies as a Good or Service under GST?: As per the CGST Act, 2017 definition of “goods” reveals that it cannot be included since it is neither a moveable object nor a claim that may be brought to court. Additionally, the GST defines “services” as follows: In addition to actions involving the use of money or its conversion from one form, currency, or denomination to another for which a separate compensation is charged, “services” refers to anything other than products, money, and securities.
  It is now made clear, in order to clear any ambiguity, that the term “services” includes facilitating or organizing transactions in securities. It appears very fair to describe cryptocurrencies as “services” because the definition of services specifies unequivocally that anything that is not good is a service.
  As a result, it is unclear how to classify cryptocurrencies under GST.

Key Points regarding Cryptocurrency Tax Rules

The following are the key points regarding Cryptocurrency Tax Rules:

• Any cryptocurrency asset profits are taxed at a rate of 30% (plus any relevant surcharge and 4% cess).
• Profits are taxed under section 115BBH.
• There is no option for a lower long-term capital gains tax rate.
• Except for purchase costs, no deductions are permitted.
• On the transfer of VDAs, a 1% TDS fee will be assessed.
• As of April 1, 2022, a 30% tax rate will be in effect, and as of July 1, 2022, a 1% TDS rate will be in effect.

Endnote

There is no doubt that Indian law on VDAs is currently developing. Even though the new tax system has been announced by the government, it will probably be changed over time. For the time being, people who want to trade or invest in VDAs must get familiar with the new tax laws and, ideally, speak with a tax professional before starting these activities. If individuals want to trade VDAs, they should ideally do so on exchanges or marketplaces rather than through off-market deals. Without any advice from the government, this might support the VDA’s fair market value.

Additionally, taxpayers should be aware that their losses cannot be offset by profits from another. Additionally, earnings on VDAs cannot be used to set off capital expenses like the price of cryptocurrency mining or the price of minting NFTs. In order to ascertain whether the relevant NFTs are regarded as VDAs for the purposes of the Income Tax Act, of 1961, those wanting to buy or deal in NFTs would also need to exercise caution and monitor the Government’s actions.

Here is the Tip, you can also connect with our Experts at Legal Window if you need assistance regarding the taxation of Crypto, and our Experts would be Happy to Help.