Taxation of Crypto Assets – A Nutshell

The wait for the most awaited amendment if finally over. The Finance Act 2022 has finally introduced a taxation mechanism on crypto currencies and crypto assets.

This article will give you a brief overview about how crypto currencies and crypto assets will be taxed in India.

Firstly, it is important to understand where the crypto currencies and crypto assets are defined. A new clause in section 2 of the Income tax Act 1961 (Act) i.e. Section 2(47A) has been introduced to define Virtual Digital Assets (‘VDA’) whose relevant extract is reproduced hereunder:

VDA means:

A. An Asset satisfying all the below conditions

• any information or code or number or token (not being Indian currency or foreign currency); AND
• generated through cryptographic means or otherwise; AND
• can be transferred, stored or traded electronically; AND
• i) providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or

ii) 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)

B. A non-fungible token or any other token of similar nature, by whatever name called

C. Any other digital asset, as the Central Government may, by notification in the Official Gazette specify

 From the above definition different type of crypto currencies and crypto assets like Bitcoin, Ethereum, Litecoin, NFTs, various other digital tokens etc. would get covered under its ambit.

 Now the taxability of VDA has been provided in another newly introduced in Section 115BBH of the Act (Applicable from FY 2022-23), which provides tax rate @ 30% (excluding surcharge and cess) on transfer of VDA. Cost of acquisition shall be allowed as deduction, however no incidental expenses (eg. Brokerage cost) shall be allowed as deduction.

Loss on sale of VDA shall be adjusted against gain on other VDA e.g. Loss on Dogecoin can be adjusted against the gains made on Bitcoin. Carry forward of loss shall be also be not allowed and therefore, set off is possible only in the current year itself.  Income from VDA is taxed at special rates under Chapter XII of the Act. If a person’s total income comprises solely of income from VDA, then the benefit of unexhausted basic exemption limit is also not extended.

 A newly inserted section 194S provides for the tax deduction on payment of VDA. Tax has to be deducted by the buyer responsible, being a resident person @ 1% . No tax has to be deducted if:

The buyer of VDA is not required to obtain Tax deduction and collection account number (TAN) as provisions of section 203A will not be applicable.

Some scenarios of the above TDS provisions can be understood better with the help of the below:

Difficulty in Withholding tax:

It will be difficult to withhold the tax when the buyer and seller do not know each other. For instance, where a transaction is done via Coin DCX, the buyer and the seller enter into a crypto currency transaction without knowing the counterparty. In that case, tax can be withheld by the Coin DCX itself and remit the balance amount to the seller. However there is no further clarity provided by the government.

Similarly, in case of peer to peer transactions executed via Binance, where buyer and seller know each other, the onus to withhold tax will be on the buyer subject to limits specified in the above table.

GIFT of VDA:

The phase property as defined in explanation to section 56(2)(vii) has been amended to include VDA, pursuant to which any receipt of VDA without consideration or for inadequate consideration by the resident individual would be taxable in the hands of the recipient as per Section 56(2)(x).

 This welcoming amendment is summarized below