Tax on Cryptocurrency

The Union Budget was revealed by India’s Finance Minister Nirmala Sitharaman on February 1, 2022. A key feature outlined in the budget she proposed addressed taxation norms pertinent to digital assets like cryptocurrency. Prior to this, there were no clear taxation norms applicable to virtual or digital assets which made taxing incomes drawn from them tricky. This article seeks to shed light on India’s new rules pertaining to tax on cryptocurrency.

Defining a Virtual Digital Asset

Before delving into the taxes applicable to cryptocurrency, it is important to understand the definition of virtual digital assets as they form the basis of this taxation policy.

As per the Finance Act the term “virtual digital asset” could be used to refer to any code, token, number, or information that isn’t of Indian or foreign currency. This has been generated via cryptographic or alternative means to provide a digital representation for the value that has swapped hands. This is based on a promise or representation of the figure having an inherent value that holds true regardless of whether it is used as an investment (barring any investment schemes), for any financial transaction or as a unit of account or as a store of value. This asset can be traded, stored and transferred electronically.

Taxes on Cryptocurrency

Outlined in the 2022-2023 Budget is a proposed tax of 30 per cent applicable to any virtual digital asset such as cryptocurrency that has transferred hands.  Other than the cost of acquisition, no deduction on the same is to be permitted. Further, no loss in the transaction is permitted to be carried forward.

The introduction of these taxes on crypto is pertinent for the following reasons.

• For starters, this initiative indicates the government’s recognition of cryptocurrency as a legitimate asset class and views its trade as a legitimate activity. 
• Next, the clarity provided on this tax will help educate people more about cryptocurrency and is likely to boost growth within this industry.
• This taxation policy can help foster a sufficiently regulated crypto ecosystem which in turn can play a vital role in boosting innovation. 
• Finally, concerns and uncertainties pertaining to the regulations, legal intricacies and taxation protocols pertaining to the status of cryptocurrencies have now been addressed and should make things clearer.

Understanding the Relevance of this Taxation Policy

The value of the introduction of this taxation policy lies in the fact that virtual digital assets have gained credence over the past decade and have begun to be traded in large volumes. This is compounded by the emergence of a market wherein the payment made for the transfer of such an asset is done via a similar asset.

Since there is a fairly high tax rate applicable to this asset class, the net gain drawn by the investors may to a certain extent reduce the appeal that virtual digital assets currently possess. By levying a high tax rate on cryptocurrencies, the government may actually be hoping to mitigate the vigor with which these virtual digital assets are invested in. This cautious attitude the government is hoping to foster with relation to these assets may stem from the fact that they are highly volatile and should be approached with caution.

 Intricacies Pertaining to Virtual Digital Asset Taxation Rules

The Union Budget of 2022-2023 also made clear the imposition of TDS on payments involving the transfer of virtual digital assets wherein a 1 per cent rate would apply to transactions that exceeded a certain threshold. It also made clear that in case such assets were gifted, the onus of paying taxes on the same would lie in the hands of the recipients. By April 1, 2023, 115BBH section pertaining to income drawn from virtual digital assets will be in place. This section will shed more light on taxation policies applicable to income derived from virtual digital assets.

Cryptocurrency exchanges as well as alternative digital asset marketplaces will now need to comply with the introduction of the one percent TDS rule and will have to utilize a tracking mechanism to ensure that it is followed by those making transactions in India as Indian citizens.

Wrapping Up

It is of paramount importance to understand the crypto capital gains tax rules such that you comply with the law and pay your taxes correctly. While the Budget has provided insight into how income drawn from virtual digital assets will be taxed, time will tell how good this measure is. Prior to making any investments in any virtual digital assets it is important to do adequate research on the same and only invest what you can afford to lose. Always understand your threshold for risk and the risks associated with the asset you are interested in investing in prior to taking the plunge.

Disclaimer: Angel One Limited does not endorse investment and trade in crypto currencies. This article is only for education and information purposes. Discuss with your investment advisor before making such risky calls.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.