In her Budget 2020 speech, Nirmala Sitharaman stated that the transfer of virtual assets would be subject to a 30% tax. This refers to cryptocurrency, even though the Indian Cryptocurrency Bill is not yet in Parliament. This may be a relief for those who have been investing with cryptocurrencies. The general consensus is that it will not be banned.
Here are some details about the taxation and transaction of virtual assets.
Is Bitcoin a virtual digital asset?
It is not mentioned in the budget speeches or documents. The budget instead spoke of “virtual digital asset”, and defined them as “any information, code, number, token (not being Indian or foreign currency), generated using cryptographic means or other, and providing a digital representation value which can be exchanged with or without consideration with the promise of having intrinsic value or functions as an account store or unit and includes its use for any financial transaction or investment, not to mention investment schemes and can also be stored, transferred, traded or transferred electronically.”
This includes, in particular, non-fungible tokens.
When will the new tax be effective?
On April 1, 2022, the new cryptocurrency (or virtual digital asset) tax will be in effect.
The new Section 115 BBH contains other clauses, one of which states that losses cannot be offset against other income sources.
Rishi Anand (a partner at DSK Legal) stated that there are no exemptions or deductions. “However, there will be more clarity on the deductions for cost of acquisition and loss from trade in digital assets during a given financial years.”
All such assets can be transferred at a 1 percent tax deducted from the source (TDS). Gifting will also attract the 30% tax
Soon after the budget has been passed by Parliament, a detailed set of guidelines will be available.
What’s the difference between virtual assets being ‘transferred’ and those that are’sold?
There are many ways that cryptocurrencies can be exchanged. Cryptocurrencies cannot be bought or sold on exchanges like you would with equity shares, mutual funds units, and other regulated assets. Two people can exchange cryptocurrency through their wallets many times. Saraf & Partners Partner Lokesh Shah said that transfer is a broad term and can include exchange. We exchange our coins by having a Bitcoin. This is covered by the tax definition of transfer. He says that the government uses the term “transfer” to cover all types of transactions.
On the other hand, a sale of crypto coins involves regular cash or currency. Both types of transactions will be taxed by the Budget proposals.
Will I have to pay taxes if I just transfer my coins between my wallets?
It should not be taxed. We need to clarify what they mean when they say “Transfer”. Rishabh Parakh (chartered accountant, founder of NRP Capitals) stated that transfer between wallets is not a sale and is similar to transferring money from one bank account to another. If you’re the account holder and the cryptocurrency exchange is your investment, you won’t be taxed for transferring coins to your wallet.
What happens to cryptocurrency I give to my family?
Yes, virtual assets will be tax-deductible in the hands and pockets of the recipients. Gifts to close relatives, which include your spouse or children, are not subject to tax. Shah stated that gifting to third parties, or people not included in the definition of relatives, is subject to tax.
What’s the use of 1 percent TDS if 30 percent tax (plus surcharge), is due?
To keep track of who purchases and sells virtual assets such as NFTs or cryptocurrencies, the government instituted a TDS of 1%. The crypto exchanges will deduct the tax at source and pass it on to the government.
No set-offs are allowed. What does this mean to crypto investors?
Experts have called this harsh. Sitharaman stated that no set-offs would be allowed for losses incurred during the transfer of virtual assets. This means that losses or profits from crypto cannot be adjusted with other incomes or losses during the current financial year, and cannot be carried forward into the next. The set-off clause can be found in most assets.
CREBACO Global CEO Sidharth Sogani stated that this would mean that, if the crypto market crashes on March 31, there is no time to recover your losses.
Naimish Sanghvi founder of Coin Crunch India said that the government should clarify whether the loss from the transfer of virtual assets can be offset by gains in other virtual assets.
Most experts who have been following digital assets for a while believe that the new tax system is punitive.
Sameer Jain (Managing Partner at PSL Advocates & Solicitors) stated that not allowing any deductions or set-offs against losses to calculate crypto gain tax is inconsistent with existing tax regimes. “Trading crypto has been declared an isolated transaction for an individual. This will be subject to tax, regardless of any overall losses.”
Only the acquisition cost can be deducted. If you invest Rs 1 lakh in crypto, and then sell it for Rs 1.5 lakh at Rs 1.5 lakh, only Rs 50,000 of the gain will be subject to tax.
“Most people don’t pay tax because they either fall under the tax-free income threshold or are in lower tax-paying brackets. Sogani stated that the flat rate of 30 percent tax is inapplicable to this situation.
He said that virtual assets are now so taxed that only the wealthy can afford to invest.