Cryptocurrency has become the talk of the town no matter where you go. However, people in India weren't as open to the whole concept as people outside of India. With time, people's perceptions changed, and now, Indians are active investors in the crypto market. Of course, people actively invest, earn and even lose money in the cryptocurrency market. But, there was never any regulation or clarity from the government about anything crypto-related.
Speculations were doing the rounds that Nirmala Sitharaman, the finance minister of India, would definitely speak about cryptocurrency in her budget on the 1st of February, 2022. The hearts of all the crypto investors were beating fast. Finally, on the day of the budget, Nirmala Sitharaman broke the ice and declared a whopping 30% tax to be levied on all the earnings that come from cryptocurrencies or any other VDA, i.e., Virtual Digital Assets. So, boom now- cryptocurrency has finally been recognised as a legal asset in India!
The finance minister also said that only the cost of purchasing digital assets could be deducted. Losses incurred in the sale of digital assets cannot be squared off against income from the sale of digital assets. A 1% tax will be imposed for exceeding the threshold. The recipient will be required to pay taxes on digital assets.
What Are Cryptocurrencies?
In simple terms, cryptocurrencies are digital currencies that can buy anything, just like our regular currency. However, the fact that it is decentralised, meaning it operates without the involvement of a middleman like a bank or financial institution or centralised authority, has made it controversial from the start.
Today, there are more than 1,500 virtual currencies in the digital currency market, including Bitcoin, Litecoin, Ethereum, Dogecoin, ADA, and Matic. Since the statewide ban was implemented, a multifold rise in investment and trading in cryptocurrencies has occurred. Despite the lack of specific regulation from the Indian Government or Reserve Bank of India, crypto investments have surged.
Decoding Cryptocurrency Taxation Laws
So, let us begin by decoding the fate of Indian Crypto investors as far as tax is concerned. But, first, let us understand the 30% tax provision with a straightforward example.
Kanika purchased Bitcoin in August 2020 for INR 8,000. Now, Kanika transfers her bitcoin for 48,000 in June 2022 with a TDS deductible at INR 480. Now, Kanika's crypto income will be INR 40,000. So, ideally, the tax levied on Kanika's crypto income of INR 40,000 at the rate of 30% is INR 12,000. However, the amount payable will be the tax amount, INR 12,000+4% cess on the tax amount. This means that 12,000+480(12000×4%)= INR 12,480. In this amount, a TDS of INR 480 has already been deducted. Therefore, the balance payable in this case is INR 12,000(12,480-480).
It is crucial to note that the foregoing pronouncements made in the Finance Bill are progressively effective from 1 April onwards. So, for example, suppose that if Kanika's Bitcoin has a value of 50,000 in February 2022, she should transfer her bitcoin at 50,000 and achieve a profit of INR 42,000.
Considering that this transaction is a short-term capital gain for 2021-2022, the tax levied on this would be as per the slab rates. If Kanika's annual income is within the tax exemption limit of 2,50,000, there will be no tax applicable on this transaction. If Kanika wants to continue to be in possession of her bitcoin, she needs to repurchase it at the current price, i.e., INR 50,000.
The loss incurred on the transfer of any of the VDAs will not be squared off or set off against any income earned. Also, the profit made in crypto cannot be crossed against loss on shares. Most importantly, there will be no future carryover of the losses incurred in cryptocurrency trading.
For example, Kanika has transferred bitcoin at a profit of INR 50,000 and Ethereum at a loss of INR 35,000 in the same year. Now, Kanika has assumed that she is supposed to be paying tax on a net profit of INR 15,000 only. Well, unfortunately, this assumption of Kanika is entirely wrong.
Gains of INR 50,000 are subject to a 30 per cent tax rate plus cess. When Ethereum is transferred, the loss cannot be deducted or carried forward. The transferee is responsible for deducting TDS if the transaction's value is more significant than 10,000. The upper limit has been raised to INR 50,000 for specific individuals:
Those individuals or HUFs from everything else except business income/profession.
A Hindu undivided single family or an individual with:
Less than one crore in annual sales.
Fees paid to professionals should be less than 50 lakh rupees.
We hope that the Cryptocurrency Taxation laws in India are unambiguous now. Thanks to the Government of India, the citizens of this country can now invest in the crypto market without any stress and also pay taxes on time.