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Crypto Tax - Everything You Need to Know

Feb 28, 2022

Rajat Mohan
Senior Partner, AMRG & Associates

Om Rajpurohit
Director, Corporate & International Tax, AMRG & Associates

Introduction

The long-awaited cryptocurrency bill, which was supposed to be introduced in Parliament during the
winter session, got delayed. Previously, the government had refused to grant cryptocurrencies the status
of legal tender. In 2018, the RBI attempted to impose a ban by restricting banking services to
cryptocurrency exchanges. The ban, however, was later overturned by the Supreme Court.

Finance Minister Nirmala Sitharaman proposed a crypto tax on transactions of virtual digital assets (VDA)
like Bitcoin and Ethereum on February 1, 2022, while presenting the "Budget 2022". Additionally, she
stated that the Reserve Bank of India (RBI) will launch its own digital currency in 2022-23. The
announcement has put an end to long-running speculations about how the Government of India will
approach the evolving digital currency space, particularly in light of concerns raised by various sections.

The rollout of a central bank's digital currency will significantly boost the digital economy. Additionally,
the digital currency will result in a more efficient and cost-effective currency management system.

What is Virtual Digital Asset?

Proposed new clause states that virtual digital asset(“VDA”) mean:

a) any information or code or number or token, generated through cryptographic means, providing a
digital representation of value exchanged, with the promise or representation of having inherent value;

b) a non-fungible token;

c) any other digital asset, as notified.

Finance Minister, Nirmala Sitharaman announced a 30% tax on income from virtual digital assets, stating
that the size and frequency of such transactions necessitated the creation of a specific tax regime.

Will you have to pay tax on both gains and losses from crypto?

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Crypto investors cannot set off any loss arising from the transfer of virtual digital assets and such loss will
not be allowed to be carried forward to subsequent financial years.

In simple words in case any taxpayer has earned any income from the transfer of a virtual digital asset,
the said income shall be subject to tax tax @ 30%. This source cannot be combined with any other
source of income. If all the tranactions during the year results in positive income, the same amount shall
be chargeable to tax at the rate of 30%.

No deduction in respect of any expenditure other than the cost of acquisition of a VDA shall be allowed to
the taxpayer under any provision of the act.

Losses arising from the transfer of crypto assets cannot be set off against any other income and also it
cannot be carried forward. However, intra-head consolidation of all VDA transactions entered during the
year is permissible.

Let's look at an example to better understand this-

A taxpayer gained Rs. 5 Lakhs on the sale of Cryptocurrency A and posted a loss of Rs. 2 Lakhs on the
sale of Cryptocurrency B. The taxpayer can set off the loss and the net gain from the sale of crypto
assets (both Cryptocurrency A and B) and Rs. 3 lakh would be subject to tax @30%.

Will you have to pay more than 30% tax on crypto income?

The effective tax rate on income from the transfer of cryptocurrencies, NFTs, or other virtual digital
assets may be higher than 30% because this flat rate excludes any applicable surcharges and cess.

The surcharge is applied at the rates of 10%, 15%, 25%, and 37% of the tax amount, depending on the
taxable income, and the cess is applied at the rate of 4% of the tax and surcharge amount. As a result,
gains from the transfer of Crypto assets may be subject to effective taxation at rates of 31.2 percent,
34.32 percent, 35.88 percent, 39 percent, and 42.744 percent, depending on taxable income in the case
of individuals/HUFs.

TDS Implications on Virtual Digital Asset

Any person who pays consideration to a resident for the transfer of a virtual digital asset is required to
withhold TDS at the rate of 1%.

There will be no TDS implication if the consideration is paid:

a) by a specified person and does not exceed INR 50,000 in the fiscal year.

b) By anyone other than the specified person, if the amount does not exceed INR 10,000 in the fiscal
year.

There will be no TCS implications where TDS has been deducted.

Gift of Virtual Digital Asset

The Union Budget for 2022-23 broadens the definition of "property" to include Virtual Digital Assets,
which will become effective on April 1, 2022. As a result, the gift of a Virtual Digital Asset will be taxable
in the hands of the person who has received it.

Open issues

Even though this is a good beginning for the Indian crypto eco-system, certain aspects require
clarification from the long-term stability perspective.

The First would be whether the acquisition cost will include direct expenses such as brokerage charges,
exchange fees, and various directly incidental expenses.

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There are various types of coin-like stable coins, utility coins whose value is derived from an underlying
asset. Government did not clarify whether such underlying assets would also be taxed at 30% or not.

Many times moneys are routed through the exchanges and sometimes it's not apparent who's
responsible for deducting TDS on exchange transactions when the buyer and seller can't be identified, if
that happens, would the taxpayer be required to figure out who's selling on the other side or buying on
this side and comply? This is a real problem that has to be addressed by the government.

Another intriguing aspect is that the new provision states that taxpayers must withhold 1% of the tax on
the exchange of virtual digital currency, whether it is entirely on exchange or barter, or partly in cash and
partly in exchange. When the cash component is insufficient to cover the 1% TDS, the person in charge
of paying must ensure that the recipient, i.e. the seller, has paid the tax. It is unclear how this will be
accomplished, whether taxpayers will be required to rely on the CA certificate, the advance tax challan,
or some other method. Clarity is required in this regard in order to avoid future contractual and legal
litigation.

There has been no clarification provided in the laws regarding the impact of TDS/TCS on global
cryptocurrency exchanges. Though it is anticipated that overseas crypto exchanges will not deduct TDS,
taxpayers will still be required to pay tax on their crypto gains. If this is not the case, the individual may
be prosecuted with tax evasion, which will result in heavy penalties when detected.

In India, more than 100 million people are involved in cryptocurrency exchanges, whereas just 60 million
people file their annual income tax forms, according to the government. Now that the finance minister
has recognised cryptocurrency exchanges as virtual digital assets and has levied a 30 percent tax on
income derived from them, the number of annual returns submitted in India may shoot up very soon.

According to Finance Ministry officials, government will levy goods and services tax (GST) on
cryptocurrency transaction fees rather than the digital asset's gross value. The definition of virtual assets
in the budget would classify cryptocurrencies or non-fungible tokens as 'intangible goods,' subjecting
them to GST.

It is still unclear whether GST will be levied on the margin or the gross value of the virtual asset. As a
result, in order to address such anomalies, the government must provide clarification.

Conclusion

Indian government is beginning to recognize crypto as an emerging asset class, and thereby introduction
of Crypto tax was a milestone in Indian income tax laws. 30% taxation will have a negligible impact on
trifling crypto investors as tax brackets are already similar to regular taxes on short-term securities
holdings.

Next issue on the block would be to untangle the GST levy on the crypto transactions. Several state tax
officers are definitely working on this thread to identify the areas for which taxation needs to be clarified.
We hope with clarification from government on GST by Budget 2023 would add stability to the overall
taxation of crypto in India.

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