Taxation of Cryptos under Finance Act, 2022 with Examples & FAQ’s

What are Virtual digital assets

Clause 47A has been introduced under section 2 of the Act which defines Virtual Digital Assets. ‘(47A) “virtual digital asset” means–

(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever 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) 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

Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.

Explanation. –For the purposes of this clause,

(a) “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;

(b) the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the foreign Exchange Management Act, 1999.’.

These amendments will take effect from 1st April, 2022.

Remarks: Almost everything we think of will be covered in this definition and if anything will be left apart, will be notified by Central Government time to time. Also it is to be noted, by taxing the gains from Cryptos, they have not made it legal or illegal. This position will be clear only after the detailed bill for the Crypto is tabled in the Parliament.

Scheme for Taxation of Virtual Digital Assets – (Section 115BBH in Finance Bill 2022 introduced)

The proposed section 115BBH seeks to provide that where the total income of an assessee includes any income from transfer of any virtual digital asset, the income tax payable shall be the aggregate of the amount of income-tax calculated on income of transfer of any virtual digital asset at the rate of 30% and the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of the income from transfer of virtual digital asset.

Deduction of Expenditure in computing Income from such transfer

No deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed to the assessee under any provision of the Act while computing income from transfer of such asset.

Setoff of Losses on Transfer of such virtual digital assets

No set off of any loss arising from transfer of virtual digital asset shall be allowed against any income computed under any other provision of the Act and such loss shall not be allowed to be carried forward to subsequent assessment years.

This amendment will take effect from AY 2023-24 and subsequent assessment years.

Remarks: Please see different cases in the table mentioned below. Government is harsh in this provision by not allowing the loss of the same FY to be set off from profits of same FY. A detailed guideline will put an end to all the speculation about it.

Introduction of TDS Provision (Section 194S)

In order to widen the tax base from the transactions so carried out in relation to these assets, it is section 194S inserted to the Act to provide for deduction of tax on payment for transfer of virtual digital asset to a resident at the rate of one per cent of such sum.

However, in case the payment for such transfer is–

(i) wholly in kind or in exchange of another virtual digital asset where there is no part in cash; or

(ii) partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such transfer,

the person before making the payment shall ensure that the tax has been paid in respect of such consideration.

Further, no tax is to be deducted in case the payer is the specified person and the value or the aggregate of such value of consideration to a resident is less than Rs. 50,000 during the financial year.

In any other case, the said limit is proposed to be Rs. 10,000 during the financial year.

It is also proposed to provide that if tax has been deducted under section 194S, then no tax is to be collected or deducted in respect of the said transaction under any other provision of Chapter XVII of the Act.

It is proposed to empower the Board to issue guidelines, with the prior approval of the Central Government, to remove any difficulty arising in giving effect to the provisions of the said section and every such guideline issued by the Board shall be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person responsible for paying the consideration on transfer of such virtual digital assets.

It is also proposed to provide that in case of a transaction where tax is deductible under section 194-O along with the proposed section 194S, then the tax shall be deducted under section 194S and not section 194-O.

Remarks: Please see FAQ’s below for details.

Specified Person Definition

For the purposes of the said section, it is proposed to provide that ‘specified person’ means a person:––

(i) being an individual or 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;

(ii) being an individual or Hindu undivided family having income under any head other than the head ‘Profits and gains of business or profession

This amendment will take effect from 1st of July, 2022

Taxation of Gifting of Virtual Digital Assets

In order to provide for taxing the gifting of virtual digital assets, it is also proposed to amend Explanation to clause (x) of sub-section (2) of section 56 of the Act to inter-alia, provide that for the purpose of the said clause, the expression “property” shall have the meaning assigned to it in Explanation to clause (vii) and shall include virtual digital asset.

This amendment will take effect from AY 2023-24 and subsequent assessment years.

Remarks: Gifting of Cryptos will be a bad decision for anyone as the person who is receiving the gift will have its Cost of Acquisition as “NIL”, as the government is going to tax this transaction of Gift of VDA anyways. 

Tax on Virtual Digital Assets- Use cases with present law in Budget 2022

S. No.	Case	Taxability and Comments
1	Mr. A purchased Bitcoins worth ₹25000 on 01-05-2022 in one transaction and sold the same for ₹35000 on 01-09-2022 to Mr. B The Profit for the transaction is ₹10,000 (Assuming only 1 transaction in the whole year)	Income from Transfer of VDA = ₹10,000/- Tax on VDA would be = ₹3,000 (₹10,000*30%) Since, the amount of transfer is less than ₹50,000 (during the whole financial year), TDS u/s 194S will not come into picture. No Need to take TAN and file TDS Returns
2	Mr. A purchased Bitcoins worth ₹75000 on 01-05-2022 in one transaction and sold the same for ₹85000 on 01-09-2022 to Mr. B The Profit for the transaction is ₹10,000	Income from Transfer of VDA = ₹10,000/- Tax on VDA would be = ₹3,000 (₹10,000*30%) Since, the amount of transfer is greater than ₹50,000, TDS u/s 194S comes into picture and Mr. B will deduct 1% of ₹85,000, i.e., ₹850/- and pay ₹84,150/- to Mr. A Mr. B will have to file TDS return quarterly by taking TAN.
3	Mr. C purchased Bitcoins worth ₹75000 on 01-05-2022 in one transaction and exchanged them with: (i) Ethereum worth of ₹95000 & (ii) Cash worth of ₹5000 on 01-09-2022 to Mr. D The Profit for the transaction is ₹25,000	Income from Transfer of VDA = ₹25,000/- Tax on VDA would be = ₹7,500 (₹25,000*30%) Since, the amount of transfer is greater than ₹50,000, TDS u/s 194S comes into picture and Mr. D will deduct 1% of ₹1,00,000, i.e., ₹1000/- and pay ₹4,000/- in cash to Mr. C instead of ₹5,000/- Mr. D will have to file TDS return quarterly by taking TAN.
4	Mr. E purchased Bitcoins worth ₹75000 on 01-05-2022 in one transaction and exchanged them with: (i) Ethereum worth of ₹99500 & (ii) Cash worth of ₹500 on 01-09-2022 to Mr. F The Profit for the transaction is ₹25,000	Income from Transfer of VDA = ₹25,000/- Tax on VDA would be = ₹7,500 (₹25,000*30%) Since, the amount of transfer is greater than ₹50,000, TDS u/s 194S comes into picture and Mr. F will deduct 1% of ₹1,00,000, i.e., ₹1000/- Now since Cash Payment is worth ₹500, i.e., insufficient to pay whole TDS of ₹1,000. Mr. F has to ensure that he deposits ₹500 before paying consideration (Ethereum worth 99500) Mr. F shall not pay ₹500 to Mr. E and the same shall be deposited in the form of TDS. Apart from cash of ₹500, Mr. F shall also ensure that an additional ₹500 is paid to Government as TDS. Mr. F will have to file TDS return quarterly by taking TAN.
5	Mr. G purchased Bitcoins worth ₹75000 on 01-05-2022 in one transaction and exchanged them with: (i) Ethereum worth of ₹50,000 & (ii) USDT worth ₹50,000 on 01-09-2022 to Mr. H The Profit for the transaction is ₹25,000	Income from Transfer of VDA = ₹25,000/- Tax on VDA would be = ₹7,500 (₹25,000*30%)Since, the amount of transfer is greater than ₹50,000, TDS u/s 194-S comes into picture and Mr. G will deduct 1% of ₹1,00,000, i.e., ₹1000/-Now since there is no Cash consideration to pay for whole TDS of ₹1,000. Mr. H has to ensure that he deposits ₹1,000 before paying consideration (Ethereum worth 50000 and USDT worth 60000) Mr. H has to ensure that ₹1000 is paid to Government as TDS (Either from his own pocket or to recover in cash and then pay TDS @ 1% to government) Mr. H will have to file TDS return quarterly by taking TAN.
6	Mr. A purchased Bitcoins worth ₹75000 on 01-05-2022 in one transaction and sold the same for ₹85000 on 01-09-2022 to Mr. B The Profit for the transaction is ₹10,000 Mr. A purchased Bitcoins worth ₹95000 on 01-10-2022 in one transaction and sold the same for ₹90000 on 01-11-2022 to Mr. C The Loss for the transaction is ₹5,000 Net Effect = Profit of ₹10,000	Income from Transfer of VDA = ₹10,000/- Tax on VDA would be = ₹3,000 (₹10,000*30%) Since, the amount of transfer is greater than ₹50,000, TDS u/s 194S comes into picture and Mr. B will deduct 1% of ₹85,000, i.e., ₹850/- and pay ₹84,150/- to Mr. A TDS u/s 194S comes into picture and Mr. C will deduct 1% of ₹90,000, i.e., ₹900/- and pay ₹89,100/- to Mr. A Mr. B & C will have to file TDS return quarterly by taking TAN
7	Mr. A purchased Bitcoins worth ₹75000 on 01-05-2022 in one transaction and sold the same for ₹80000 on 01-09-2022 to Mr. B The Profit for the transaction is ₹5,000 Mr. A purchased Bitcoins worth ₹95000 on 01-10-2022 in one transaction and sold the same for ₹85000 on 01-11-2022 to Mr. C The Loss for the transaction is ₹10,000 Net Effect = Profit of ₹5,000	Income from Transfer of VDA = ₹5,000/- Tax on VDA would be = ₹1,500 (₹5,000*30%) Since, the amount of transfer is greater than ₹50,000, TDS u/s 194S comes into picture and Mr. B will deduct 1% of ₹80,000, i.e., ₹800/- and pay ₹79,200/- to Mr. A TDS u/s 194S comes into picture and Mr. C will deduct 1% of ₹85,000, i.e., ₹850/- and pay ₹84,150/- to Mr. A Mr. B & C will have to file TDS return quarterly by taking TAN
8	Mr. A minted a NFT “XYZ” and has expensed ₹25000/- for it. Now this NFT is sold by Mr. A for ₹100000/- to Mr. B Now Income from transfer of NFT is ₹75000/- (100000-25000)	Income from Transfer of VDA = ₹75,000/- Tax on VDA would be = ₹22,500 (₹75,000*30%) Since, the amount of transfer is greater than ₹50,000, TDS u/s 194-S comes into picture and Mr. B will deduct 1% of ₹1,00,000, i.e., ₹1000/- and pay ₹99,000/- to Mr. A Mr. B will have to file TDS quarterly return by taking TAN
9	Mr. A received a Gift of 0.01 BTC assuming it to be of value of ₹30,000. Now this Airdrop is sold by Mr. A for ₹60000/- to Mr. B Now Income from transfer of this VDA (0.01 BTC) is ₹60000/- (since the cost of acquisition is Zero in case of Airdrop)	Income from Transfer of VDA = ₹60,000/- Tax on VDA would be = ₹18,000 (₹60,000*30%) Since, the amount of transfer is greater than ₹50,000, TDS u/s 194-S comes into picture and Mr. B will deduct 1% of ₹60,000, i.e., ₹600/- and pay ₹59,400/- to Mr. A Mr. B will have to file TDS quarterly return by taking TAN

Tax on Virtual Digital Assets- FAQ’s 

Q-1 In case of VDA, Do Individuals purchasing cryptocurrency from exchanges have to deduct TDS of exchanges, as one cannot know from whom he is purchasing it?

Ans. The position of law is unclear about this issueThere may be a provision that may be provided in Guidelines by Government which may provide for exemption of such TDS if it is done by KYC-compliant exchanges

Q-2 Whether my loss for Crypto Transactions of Same FY will be allowed against profit of same FY?

Ans. The law is very unclear about the same and we expect the guidelines to clear all the ambiguity that is floating in the market. But if we draw a preliminary view of the Section 115BBH, we can say that Government wants to tax only the gains on transfer of Virtual Digital Asset (VDA) @ 30%, they are treating it similar to Lottery, where if you purchase 5 lottery tickets of ₹100 each, & you win a lottery of ₹50000 for 1 lottery ticket of ₹100, gain would be ₹49900 (50000-100) and not ₹49500 (50000-500).

Again, this is still a preliminary view, guidelines will make this clearer.

Q-3 If no consideration is paid in cash, then how to ensure payment of 1% TDS?

Ans. Section 194-S says that person paying consideration for transfer of VDA has to ensure the payment of such taxes to government. The person making payment of consideration has to either collect and then pay to government, or to bear such cost from their own pocket.

Q-4 If I sell my portfolio in the current year (before 01-04-2022), then will I be exempted from paying Income Tax?

Ans. Cryptos are taxed even now also, only difference next year will be that we will have a separate section to offer such income at a flat rate of 30%. It is better to pay taxes @ 30% this year also.

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Disclaimer: These are all based of preliminary opinions of the Finance Act, 2022, the position of law will be more clear when we have a detailed guideline from the government