Income Tax on Cryptos under Budget 2022 : 30% Income Tax, TDS — 1%
Financial Year : 2022–23
Assessment Year : 2023–24
Highlights :
Ø Defining Cryptocurrencies as Virtual Digital Assets
Ø Taxation on Virtual Digital Assets explained
Ø Gifts : Income Tax on Gifts received in the form of Virtual Digital Assets
Ø Transfer of Virtual Digital Assets : Taxation on any Loss from such Transfers
Ø TDS : 1% explained with examples
Budget Specials for Income Tax & TDS for Cryptocurrencies :
Income Tax : 30%, TDS : 1%
Cryptocurrencies termed as Virtual Digital assets
In Budget 2022, Indian Govt. has announced long-awaited revolutionary changes to the ‘Virtual asset class’. First time, Govt. has termed digital assets along with crypto assets under ‘Virtual Digital Assets’. It includes all the Cryptos, ex — Bitcoin, Ethereum, NFTs (Non-fungible tokens), etc.
The government has levied 30% income tax rate on the transfer (sale/purchase/gift) of ‘crypto assets’ (Virtual Digital assets). This is being considered a landmark step taken by the govt. in clarifying directions to investors and entrepreneurs transacting in Cryptocurrencies/Digital assets/virtual digital assets in India.
There is exponential growth in number of crypto investors & crypto investments including trading in India over the past few years say about last 5 years. Estimated huge growth in numbers of crypto investors in India over the last few years, more than 2 crores app. With crypto holdings of more than INR 40,000 crores, the government has come out with the tax provisions in Budget 2022 for the crypto industry :
Ø Cryptocurrencies have been defined as Virtual Digital Assets which includes all types of cryptocurrencies (except Central Bank Digital Currency — CBDC issued by RBI) including NFTs.
Ø Income Tax of 30% will be levied on all incomes generating from the transfer (sale/purchase/gift) of ‘crypto assets’ (Virtual Digital assets).
Ø TDS of 1% will be deductible at the amount paid for the transaction.
Ø Tax of 30% on gifts received in cryptos, will be levied in the hands of the recipient of such gift.
The proposed income tax is applicable from 1st April 2022 and the TDS of 1% is applicable from 1st July 2022, to be effective from financial year FY 2022–23 onwards.
Applicability of Tax :
This income tax rate of 30% is applicable to retail investors, traders, or anyone transferring crypto assets / virtual digital assets during a financial year without distinguishing between short-term and long-term gains. Profits arising from the transfer of virtual digital assets during a financial year starting from April 01, 2022 (Financial year 2022–23) is taxable @30% income tax rate irrespective of the time period for which the asset is hold.
Tax rate of 30% would remain the same irrespective of the nature of income which means either investment income or business income or speculative gain.
Please note, income tax is applicable only at the time of transfer of crypto-asset which means during the holding period, no tax is applied.
Example :
Let’s assume, you made an investment of Rs. 50,000 in crypto anytime before 31.03.2022 (FY 2021–22). You sold your investment of crypto anytime after 31.3.2022 but before 31.03.2023 for Rs. 80,000. You will be taxed under Income tax @30% on this income which arose during FY 2022–23 (AY 2023–24). There is income of Rs. 30,000 (80,000–50,000). Income tax would be Rs. 9000 i.e. 30% of Rs.30,000.
In the above example, if the asset would have been sold before 31.3.2022, then tax will be applicable but under the old regime of Income-tax, because income arose during FY 2021–22 (01.04.21 To 31.03.2022).
Income tax on only realized gains from Crypto Transactions :
Income will be applicable only on the realized gains arising from the transaction of crypto, which means there will be no income tax till the time of holding the crypto assets. Once the transaction is executed, only then income tax will be levied whatever the holding time period is.
NOTE : In the following example, we will understand the concept of crypto taxes by adjusting the losses in the same financial year from the same source and not considering prior period losses from any other source.
Example :
Financial Year : 2022–23 (01.04.22 To 31.3.23)
Assessment Year : 2023–24
Transaction 1 : Purchased ETH for Rs. 10 Lakhs, and sold ETH for Rs. 12 Lakhs. There is Net profit Rs. 2 Lakhs (Rs. 12 — Rs. 10 Lakhs).
Transaction 2 : Purchased USDT for Rs. 20 Lakhs, and sold USDT for Rs. 19 Lakhs. There is Net loss Rs. One lakh (Rs.20 — Rs.19 Lakhs).
Net Income / Loss : Rs. 2 Lakhs (profit from transaction 1) — Rs. 1 Lakh (loss from transaction 2) = Rs. 1 lakh.
Income tax to be paid : 30% of Rs. 1 lakh = Rs. 30,000
Taxing Crypto Gifts : 30%
Gifts made in the form of cryptos/virtual assets will be taxed @30% flat in the hands of the recipient. Such gifts received in India from outside India or from within India will be taxed @30% in the hands of the recipient.
Allowance / Disallowance of any expenditure :
Any expenditure incurred to earn income from cryptos/virtual digital assets, is not allowed to be deducted from such income. Ex — you incurred expenditure against any membership fee for taking strategies/tips to trade crypto / virtual digital assets to earn crypto income and such expenditure will not be allowed to be deducted from the income arising from such trade of cryptos.
Only cost of acquisition will be allowed for deduction against any expenditure or allowance from the sale amount of crypto / virtual digital assets. Such acquired value will be the actually paid amount to acquire such crypto/virtual digital assets during any past period.
Benefit of cost of indexation is not available under this special treatment.
Disallowance of Loss from any other source of income :
If you incurred any loss under any other source of income / head of income, such loss can not be set off against the gains from crypto transactions. It means only crypto losses will be set off against crypto incomes and that too of same year.
Ex — Suppose you have a business income of Rs. 1 lakh from business A in FY 2022–23 and simultaneously there is a business loss of Rs. 1 lakh from your crypto business during the same FY 2022–23. You will have to pay taxes on gain from business A without adjusting loss from crypto business because crypto loss is not allowed to be adjusted against gains from other sources of incomes.
Carry forward of Crypto losses not allowed :
Loss from crypto transactions cannot be carried forward to next year, which means the current year’s loss from crypto transactions will need to be adjusted only against income of the same year but is not allowed to be adjusted against the future income from crypto transactions.
Ex — During FY 2022–23, there is loss of Rs. 1 lakh from crypto/virtual digital assets. Now, during FY 2023–24, there is a gain of Rs. 2 lakhs from crypto. You cannot set off loss of FY 2022–23 against the gain of FY 2023–24.
Defining Cryptocurrencies as Crypto Virtual Digital Assets :
TDS — 1%
The Government has levied TDS of 1% on the amount of crypto transactions at the time of transfer of crypto / virtual digital assets from one wallet to another. The concept of TDS has been introduced under section 194S here is with the motive of capturing the transactions and keeping track of investments in crypto space through the Centralized crypto exchanges.
Applicability of TDS 1% from 1st July, 2022.
Who will deduct TDS?
The buyer of the digital asset will deduct the TDS while making the payment to the seller of the digital asset.
Who will deposit TDS?
Now, the question here is about transactions happening at centralized exchanges, via P-2-P and decentralized exchanges. As per provisions, TDS will be deducted & deposited by the person making payment to the seller. It means, it’s clear in the case of P-2-P & decentralized exchanges, person making payment to the seller will deduct & deposit TDS.
In the case of Centralized exchanges, the exchange itself will deduct TDS from the amount of transaction happening between buyer & seller at the platform of the exchange, and TDS will be deposited by the exchange itself. Provisions of the E-Commerce platform will be applicable here in regard to TDS’ deduction & deposit.
Threshold Limits of TDS :
However, TDS will not be required to be deducted if the buyer:
- Is a specified person, and the cumulative value of purchase does not exceed Rs.50,000 in the financial year
- Is not a specified person, and the cumulative value of purchase does not exceed Rs.10,000 in the financial year
Here, a specified person means an individual or a Hindu Undivided Family (HUF) whose total turnover from the business does not exceed Rs. 1 crore rupees or Rs. 50 Lakhs rupees in case of the profession, during the preceding financial year.
Should TDS kill the crypto trade?
If we look at the mechanism, then the answer is yes. Because levying 1% TDS on every transfer of crypto means traders/day traders will have to pay 1% on every transacted amount which will be a huge burden for them. Trading is the backbone of crypto trade not only in India, but also across the globe. It is also not clear how the mechanism will work for Decentralized exchanges.
But with my past experience since 1990s, I can opine that this provision should be rolled back.
Ex — Can you imagine, if a trader makes 10 transactions of BTC in a day at an average price of Rs.40 lakhs, then TDS of 1% on one transaction is Rs. 40,000 and on 10 transactions will be Rs.4 lakhs.
Q.: Do I need to report or file my Crypto Income tax return as per provisions of Budget 2022?
Ans : No, you need to report your crypto incomes or losses of FY 2021–22 (01.04.2021 To 31.03.2022) as per the old regime of Income Tax. New provisions announced in Budget 2022 will be applicable from 1st April, 2022 (for Incomes or losses) and TDS provisions from July 01st, 2022. It means you will need to file your 1st Income tax return as per Budget 2022 for the FY 2022–23 / AY 2023–24 (01.04.2022 To 31.03.2023).
Related documents :
Future of Crypto Legislation | Crypto Regulations in India — Cryptos N Coffee | CRYPTOCNCEX.COM — YouTube : https://www.youtube.com/watch?v=Cw1Ax7aOjP8
Crypto FAQs (About Crypto Regulations, Trading, Taxes & CBDC in India) | Cryptos N Coffee — CNCEX — YouTube : https://www.youtube.com/watch?v=1yxc2mIVpec
IS CRYPTO = Money ?
About the Author :
By : Kumar Pankaj
I am from the Finance field like ICWAI, CA, Auditing & Income Tax, and International business trade. Since 2020 I am in into blockchain & cryptocurrencies — Consultancy, Investments & Trading advisory services. In blockchain, Supply chain & Crypto finance is my core.
