This blog post has been written by Akhil G Krishnan and edited by LAWYASA
Have you invested in crypto yet? Or do you plan to? The trend of cryptocurrencies as an investment option has gained immense popularity in recent years. What does this mean for the Tax implications? What part of the transaction is the tax applicable on? How do you become liable? Read further to find out!
WHAT ARE CRYPTO-CURRENCIES?
Cryptocurrencies are digital currencies comparable to our other widely used currencies that may be used to purchase goods and services. Blockchain technology is used to manage the decentralized digital assets known as cryptocurrencies, such as Bitcoin and Ethereum. Due to the decentralized character, which refers to its functioning without the need of an intermediary like banks, financial organizations, or central authority, it has been primarily contentious from its inception. 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.
More than 1,500 virtual currencies are exchanged now in the realm of digital currencies, including Ethereum, Litecoin, Dogecoin, Ripple, Matic, and others. Since the national lockout, the volume of cryptocurrency investments and trades has skyrocketed.
THE ‘CURRENCY’ OR ‘ASSET’ CONUNDRUM
Tax professionals have been debating whether to classify cryptocurrencies as “assets” or “currencies.” The terms “crypto-assets” and “crypto-currency” are frequently used interchangeably. It would be safe to describe it as an “asset/property” in the lack of legal support from the government for defining it as a “currency.” Classifying them as “assets” would be a better course of action than any official explanation because the tax implications would exist regardless of their juridical status. The U.S. government recently published a notification defining cryptocurrencies as “property” and charging capital gains taxes on gains from their sale.
LEGALITY OF CRYPTO-CURRENCIES
Cryptocurrencies were to be included as virtual digital assets (VDA) in the Union Budget 2022. 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 the profit derived from the transfer of cryptocurrencies and other virtual digital assets, such as NFTs.
The Indian government has not yet given cryptocurrencies the status of legal tender. RBI attempted to enact a ban in 2018 by denying banking services to cryptocurrency exchanges. However, the Supreme Court rejected the prohibition because it violated constitutional principles and the rights of virtual exchanges.
The validity of cryptocurrencies has been a point of contention for the Indian government, but when a tax was imposed on gains made from them with a need for tax deduction at source (TDS), it was a matter of compliance with tax law. Since the TDS regulation went into effect on July 1st, exchange-wide bitcoin trading volumes have fallen by as much as 80%. Although a decline was generally anticipated, it is amazing how abrupt it happened.
Their trading may have been hindered by the perception that a tax on value enhancement rendered them unsuitable for investments in light of the turbulence plaguing the world’s cryptocurrency exchanges. The highest marginal rate levied in India is 30% on capital gains. While a 1% TDS does incur an additional administrative cost, the abrupt strain it put on cryptocurrency trades would indicate that a significant number of tax evaders were scared off the market due to the traceability that TDS entails. Exchange volume may return to its previous highs, but it could take some time given the reversal of easy money policies and the depletion of portfolios caused by a series of crypto scandals.
Even though there are still a lot of discussions that the Indian Government needs to have with the Indian populace regarding the regulations it will set for “Virtual Digital Assets,” in accordance with the Budget 2022 session, here are a few things to consider if you are planning to invest in crypto-currencies:
TRACING TRANSACTIONS THROUGH TDS
To record transaction information and keep tabs on investments being made in crypto assets, a TDS of 1 percent has been implemented. As a result, you must subtract 1% TDS from the transaction value each time you sell a crypto asset throughout the financial year (up to a specified level). The taxation of crypto assets is governed by specific regulations in many nations throughout the world. The proposed tax policy for virtual assets in India raises several particular problems that need greater clarification, but the government has gone a step further to ensure openness in recognizing crypto assets.
As per the Income-Tax Act of 1961 Section 206AB:
1. The tax (TDS) to be withheld from cryptocurrency-related transactions will be 5% if any user has not submitted their income tax return in the preceding two years and the amount of TDS in each of those two years was at least INR 50,000.
2. TDS requirements will apply if an order is placed before July 1, 2022, but the trade is performed on or after that date.
NATURE OF CLASSIFICATION
There are no differences between short-term and long-term profits when applying the flat income tax rate to retail investors, traders, or anybody moving cryptocurrency assets in a given fiscal year. Any gains generated from the transfer of virtual assets will be subject to a 30 percent tax rate. Notwithstanding the type of income, such as whether it comes from a business or investments, or the length of the holding period, the tax rate will always be the same.
In order to understand this better, let’s look at an illustration:
If a crypto investment of INR 1,000,000 was made at the start of FY 2022 and was sold for INR 1,50,000 by the end of FY 2022, a flat 30 percent tax rate is imposed on income gain of INR 50,000. As an investor, you will be required to pay INR 15,000 in tax on your cryptocurrency revenue for that fiscal year (plus surcharge and cess). It should be highlighted that any income from cryptocurrency transactions will only be taxed at the time of transfer, so long as the asset is held, the holding will not be subject to tax on unrealized profits.
We are sure that numerous questions must have popped into your mind after reading so much. Don’t worry, we are here to help:
Q: What if the cryptocurrency transaction’s earnings are considered capital gains?
A: Profits from cryptocurrency-related transactions that qualify as investments will be counted as capital gains.
Q: What if the cryptocurrency transaction ends up in loss?
A: There are still no precise and certain tax-related restrictions in place for situations when your cryptocurrency-related transactions have made a loss.
Q: What if the transactions related to crypto-currency are classified as Business income?
A: When crypto transactions are recorded as company revenue, the Goods and Services Tax (GST) law must also be considered. Anything that is not a good, security or financial asset is considered a service. It comprises actions involving the use of money, its conversion into cash, or its use in any other way for which a separate compensation is charged. According to this definition, the sale and purchase of crypto tokens might be subject to GST as it constitutes the provision of commodities or services when classified as business income.
Q: How will the 30% cryptocurrency tax be applied to salaries paid in cryptocurrency?
A: Cryptocurrency salary is not subject to the 30% tax module. It will be taxed as “income from salary” because it is a salary.
Q: Can the loss on one cryptocurrency asset be offset by the gain on another cryptocurrency asset?
A: Losses on set-off are not permitted. For instance, if you invested in ETH or Ethereum and made a profit, but lost money on your BTC investments, the BTC losses won’t be included. You will be subject to the 39 percent tax enacted at the conclusion of the fiscal year on your Ethereum gains.
Q: Is mining cryptocurrency subject to taxes?
A: The crypto tax law states that cryptocurrency mining is not taxed. However, you will need to report it as business income if you receive any cryptocurrency tokens as a consequence of mining.
Q: What if virtual assets were given as gifts instead of being transferred?
A: Virtual asset donations are also subject to taxes, with the recipient responsible for paying income tax at a fixed rate of 30%. (In addition to surcharge and cess). This applies to anyone who sends virtual products to family members in India, such as cryptocurrencies or NFTs.
The government has yet to make clear whether or not cryptocurrencies are lawful. The government has not recognized cryptocurrencies as a form of payment or a means of exchange, but it has regarded them as assets in order to give them the status of virtual digital assets. This is something that can be seen. As stated by Union Finance Minister during her Budget speech, the lack of set-off and carry-forward of the loss recorded for such an asset and a TDS rate to track the transactions of cryptocurrency and other digital assets suggests that the government is unsure about the situation and wants to launch its own digital currency backed by the Reserve Bank of India.