As we deep dive into taxation of cryptocurrency in India, and we need to be clear in our minds that the government on the one hand has given legitimacy to the transaction in VDA’s and on the other hand it has treated them at par with casual Income i.e. taxing at a maximum applicable rate without any exemptions and allowances.

Further, Government through necessary amendments in the Income tax act has put down to rest various confusions / permutation and combinations with regards to the taxation of the Cryptocurrency / VDA / NFTs. Etc..

How are crypto currencies treated from taxation Perspective around the world??

Country As Currency Then What
USA No Property taxed as Capital Gain
Canada No Commodity
Russia No Digital Assets
United Kingdom No Property
Australia No Digital Assets
Switzerland Zurich: Yes Bern: Digital Assets
India No Digital Assets

What is a Virtual Digital Asset as per Indian Taxation Laws??

Section 2 sub section 47A defines “virtual digital asset” as—

(a) any information or code or number or token (not being Indian currency or foreign currency)

  • generated through cryptographic means or otherwise
  • Irrespective of the name called
  • providing a digital representation of value
  • exchanged with or without consideration
  • with the promise or representation of having inherent value, or functions as a store of value or a unit of account
  • including its use in any financial transaction or investment, but not limited to investment scheme;
  • and can be transferred, stored or traded electronically;

(b) Shall not include information or code or number or token that is recognized as foreign currency or an Indian Currency under the Reserve Bank of India Act

(c) a non-fungible token or any other token of similar nature, by whatever name called. “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;

(d) any other digital asset, as the Central Government may, by notification in the Official Gazette specify:

 Which types of tokens does the Income tax definition for Cryptocurrencies / VDA’s cover??

VDAs have various use cases, although, there is no standard classification, certain authorities have classified VDAs based on their functions. For example,

1. Payment tokens: certain crypto assets can be viewed as payment tokens which are used as a medium of exchange or goods or services and also as a store of value

2. Property Tokens:certain tokens represent rights in property.

3. Governance Tokens: governance tokens allow token holders to exercise control over the ecosystem.

4. Utility Tokens:utility tokens facilitate the exchange of or access to specific goods or services etc.

5. Security Tokens: crypto-assets which fulfil the characteristics of ‘securities’ as defined under securities laws

Side Note:

1. The legislation makes way for issue of sovereign digital currency in future. The Finance Minister has also announced introduction of Central Bank Digital Currency (CBDC) by the Reserve Bank of India (“RBI”) using blockchain starting 2022-23

2. Since the regulation uses the words “information” or “code” or “number” or “token”, a pertinent question arises whether the came will include discount coupons, points / cashbacks etc earned. The law leaves the same for interpreters to interpret.

3. List of NFT yet to notified could be exhaustive and discretionary. At the same time it may be difficult to quantify and classify given the fungible nature of the tokens.

4. Till the time NFT’s are notified the classification of the same will still be under confusion.

5. Government has also created discretionary powers in the act itself to notify any asset at a currency or otherwise paving way for adoption of digital tokens as currencies, but the same seems to be very long shot

Tax on Cryptocurrencies in India

When will Crypto’s / VDA be taxed??

The Tax shall only be payable upon transfer of VDA’s. The Income tax defines transfers as:

  • the sale, exchange or relinquishment of the asset
  • the extinguishment of any rights therein
  • the compulsory acquisition thereof under any law
  • in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment

“transfer” includes and shall be deemed to have always included

  • disposing off or parting with an asset or any interest therein,
  • or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise,
  • notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India

How is Crypto Income taxed and how the same is different between current and past Income tax Regime??

Pre 1st April 2022 Post 1st April 2022
Tax Rate on Transfer Frequent trading: Business Income (At applicable rates)

Fewer transactions:

Holding period

< 3 years: Short term Capital gain

> 3 Years: Long term Capital Gain

30%
Deduction of Cost of Acquisition / Purchase Yes No
Any Other Expenses:

  • Purchase Transaction Cost
  • Sell side Brokerage and expense
  • Infrastructure cost on mining
  • Any other related cost
Yes No
Set off of loss (Same Financial year

  • Against Loss from Cryptocurrency
  • Against Any other loss

Carry forward of unadjusted loss

Yes

Yes

Yes

No

No

No

Adjustment of Losses From Other sources of Income by the Losses from Crypto Currency As per the Applicable provisions No
Applicable from 1st July 2022
Tax to be deducted at source (194S) w.e.f. 1 st of July, 2022

  • Purchase
  • Sale

Irrespective of whether the transaction has been made in Cash or Kind

Nil

Nil

Nil

1% of the complete transaction

What are the provision of TDS with respect to Cryptocurrency?

Payment on transfer of virtual digital asset. Section 194S(See rules 30, 31, 31A, 31ACB, 37BA and 114-I)

  • Any person responsible for paying
  • to any resident
  • any sum by way of consideration for transfer of a virtual digital asset
  • shall, at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier
  • deduct an amount equal to one per cent

Provided that in a case where the consideration for transfer of virtual digital asset is—

(a) wholly in kind or in exchange of another virtual digital asset; or

(b) partly in cash and partly in kind

the person responsible for paying such consideration shall, before releasing the consideration, ensure that tax required to be deducted has been paid in respect of such consideration for the transfer of virtual digital asset.

The provisions of sections 203A and 206AB, w.r.t. to higher TDS deduction in case of non filling of Income tax Return, shall not apply to a specified person.

For the purposes of this section “specified person” means a person-

(a) being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred

(b) being an individual or a Hindu undivided family, not having any income under the head “Profits and gains of business or profession

Notwithstanding anything contained in sub-section (1), no tax shall be deducted in a case, where—

(a) the consideration is payable by a specified person and the value or aggregate value of such consideration does not exceed fifty thousand rupees during the financial year; or

(b) the consideration is payable by any person other than a specified person and the value or aggregate value of such consideration does not exceed ten thousand rupees during the financial year.

The Section for deduction of TDS on VDA will supersede the Section 194 O, as and where applicable.

Can you please Simplify on whom will the tax be deducted on cryptocurrency transactions? 

Sl. No. Category of Seller Threshold limit of turnover or gross receipt Threshold limit of consideration
1. Individual or HUF having Business or profession Income < Rs.1 crore (for business)

< Rs.50 lakhs (for profession)

(Also includes an individual not engaged in any business or profession)

Rs. 50,000
2. Any other Individual, HUF, Firm Rs. 10,000
3. LLP Company or any other Person Rs. 10,000

Thus, if the category 1, 2 or 3 sell any VDA’s / Cryptocurrencies, tax will be deducted by the facilitator or incase if it’s a P2P transaction then by the purchaser himself.

If the Pan no. of the Seller is not available then tax would be required to be deducted at 20% u/s 206AA

In case of Category 1 and Category 3 if the assessee has not filled income tax return in the preceding financial year then tax shall be deducted at 5% u/s 206 AB

What if someone receives VDA’s/ Cryptocurrencies as gift??

As per Section 56(2)(x), of the income tax act, when any person receives any benefit, whose value exceeds Rs. 50,000 the same shall be taxable at prescribed rates. This shall also include deemed income, where deemed income includes but not restricted to   Receiving specified movable properties without consideration or for inadequate consideration

The deemed income under this provision can arise from the following transactions:

(a)  Where any property is received without consideration and the aggregate fair market value of which exceeds Rs. 50,000, the whole of the aggregate fair market value of such property will be chargeable to tax.

(b)  Where any property is received for a consideration that is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000, the difference between fair market value and consideration is chargeable to tax.

In both the situations, the limit of Rs. 50,000 shall be checked for every transaction and not in aggregate of all transactions.

The Finance Bill, 2022 proposes to include virtual digital assets within the scope of movable assets.

Thus, if a person receives a virtual digital asset without consideration (gift) or for inadequate consideration and the value of such benefit exceeds Rs. 50,000, it shall be taxable in the hands of the recipient under Section 56(2)(x) as income from other sources.

How to Determine fair market value of virtual digital assets received as a gift??

The fair market value of the virtual digital asset for taxability under Section 56(2)(x) shall be determined in accordance with Rule 11UA.

If purchased from registered dealer: In case the virtual digital assets are purchased on the valuation date from a registered dealer, the invoice value of such asset shall be its fair market value.

If received in other mode: In case the virtual digital assets are received by any other mode (i.e., mining, etc.) the fair market value of such asset shall be estimated to be the price that it would fetch if sold in the open market on the valuation date. If the value of such asset exceeds Rs. 50,000, then the assessee may obtain the report of the registered valuer in respect of the price it would fetch if sold in the open market on the valuation date.

What shall be the tax rate if Cryptocurrency / VDA is received as a gift??

The value of the benefit arising under this provision shall be taxed at the rate applicable to the assessee. Such income shall not be taxed at 30% under Section 115BBH because it does not arise due to the transfer of a virtual digital asset. However, when the recipient further transfers such assets, the resultant gains shall be taxable under Section 115BBH.

What are the Disclosure requirements for Cryptocurrency / VDA??

Ministry of Corporate Affairs (MCA) has made it mandatory to disclose gains and losses in virtual currencies. Also, the value of cryptocurrency as on the balance sheet date is to be reported. Accordingly, changes have been made in schedule III of the Companies Act starting from 1 April 2021. The above regulation only applies in case of companies.

As per the income tax act, an individual / HUF needs to disclose all his assets and liabilities in the Income Tax Return for the period when his Net Taxable Income exceeds 50 Lacs Rs.. The Cryptocurrency / VDA’s would be covered in the definition of assets for the purpose of above disclosure.

The Author is a Practising Chartered Accountant with Ajay A Goel and Co.. The author specialises in Income Tax Advisory. This article is based upon author’s understanding of the new crypto regulations in India as per the Income Tax Act. Incase of any doubts or suggestions please feel free to get in touch.

You can read more about us at www.aagc.in

 

Author Bio

Qualification: CA in Practice
Company: AJAY A GOEL AND COMPANY
Location: Kanpur, Uttar Pradesh, India
Member Since: 11 Aug 2020 | Total Posts: 2

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