Virtual Digital Assets - Crypto Tax Explained
India’s Finance ministry in its 2022-23 Union Budget, proposed a new tax on “Virtual Digital Assets” under Section 115BBH of the Income Tax act. The proposed tax provision for virtual digital assets was later passed vide Finance Act, 2022.
Here is a detailed guide on how virtual digital assets including cryptocurrencies will be taxed from April 1st, 2022.
Here is how a virtual digital asset (VDA) is defined under the Income Tax act:
● Any information, code, number, or token generated through cryptographic methods (that is neither Indian or foreign currency). This asset must be a:
o Digital representation of exchanged value or the promise of inherent value.
o The function of the stored value of a unit of account (used in any financial transaction or investment), but not limited to any investment scheme.
o Digitally stored, transferred, or traded assets.
● A non-fungible token (NFT) or similar token
● Digital assets as notified by the Central government in its official gazette.
30% Flat Income tax on gains
A flat 30% income tax rate (plus applicable surcharge and cess) will be applicable on any gains (or income) earned from the sale/transfer of cryptocurrency assets.
Here is an example: if a crypto retail investor (or trader) purchases a crypto asset for ₹30,000 and sells it for ₹50,000, then a tax of 30% (plus applicable surcharge and cess) on the gain of ₹20,000 will be applied (tax amounting to ₹6,000).
No deductions
Under the new provisions, no deductions (other than the cost of acquisition of the crypto currency) will be available when computing the individual’s income tax on cryptocurrency related transactions.
No set-offs
This clause is regarding losses incurred during the transfer of VDAs. Losses incurred from the sale of one VDA (for example, Bitcoin) cannot be set off against income earned from the sale of another VDA (for example, Ethereum). Set-off of losses cannot be allowed against other income earned by the individual as well.
For instance, if a retail investor (or trader) incurs a loss of ₹15,000 in the transfer of Ethereum and a profit of ₹20,000 in the trade of Bitcoin, they cannot set off the Ethereum loss against the Bitcoin gain. They are still liable to pay income tax on the gain of ₹20,000 in the Bitcoin trade.
Which crypto transactions are applicable for taxation? Here are a few examples:
| Transactions | Taxable (Yes/ No)? |
|---|---|
| Selling cryptocurrencies in fiat currencies | Yes, Income is Taxable under Section 115BBH @ 30% + applicable Surcharge & Cess |
| Trading cryptocurrencies (without converting to fiat currencies) | Yes, Income is Taxable. Exchange of Crypto for another asset will also be considered as transfer of VDA and hence income will be taxable under Section 115BBH @ 30% + applicable Surcharge & Cess |
| Using cryptocurrency to buy goods (or services) in India or abroad | Yes, Income is Taxable. Fair market value of the Cryptocurrency used to make purchase of goods will be considered as sale consideration and income from transfer of VDA and will be taxable under Section 115BBH @ 30% + applicable Surcharge & Cess. |
| Transferring cryptocurrency from one crypto wallet to another | Not Taxable. This does not constitute transfer as per 2(47) of the Income Tax Act, and therefore Section 115BBH will not apply. |
| Service charges on professional advice provided by crypto experts | New Crypto Tax rules are applicable only to those carrying out transfer as per the provisions of the Income Tax Act. So, while Section 115BBH of the Income Tax Act will not apply here, this income received will be chargeable as business income and will be taxable at normal applicable income tax rates. |
| Crypto transactions made by Indian retail investors in foreign crypto exchanges | Yes, Taxable. For an Indian resident, global income is taxable in India and therefore the same new tax rules are applicable for payment of taxes even though transactions are carried out via foreign based exchanges such as Binance, Coinbase, FTX etc. |
| Non-resident Indians investing in crypto assets in India | Yes, Taxable. NRI needs to first evaluate his/her residential status as applicable under the Income Tax Act. However since, these investments are carried out in India - the income from sale of crypto will be taxed in India at the same rate i.e., 30% (plus applicable surcharge and Cess) under the new provisions of the Act. |
No. Section 115BBH of the Income Tax Act does not make any distinction in tax rates between Individuals/HUFs/Professionals/Corporates. Therefore, the gains (net of cost) are taxable at 30%. However, Surcharge and Cess are different for different categories of taxpayers and will be applicable accordingly.
If a retail investor or trader receives VDAs like cryptocurrencies as a gift, is it taxable in India? The answer is yes. VDAs will be taxable and are levied on the individual receiving the gift. Under the Income Tax act, gifts in the form of cash or movable (or immovable) properties are taxable as income for the individual receiving them.
Here are a few exceptions that are not applicable for taxation:
● Gifts are received on certain occasions like the individual's marriage, inheritance, or will.
● Gifts received from relatives (as defined in Income Tax Act, Section 2(41))
● Gifts received from non-relatives (up to a maximum aggregate value of ₹50,000)
Gifts in crypto (In case the value exceeds 50,000) will be taxable at normal income tax rate applicable to assessee. Such income shall not be taxed at 30% (plus applicable Surcharge and Cess) as per Section 115BBH introduced in Finance Act, 2022 because it does not arise due to transfer of VDA as mentioned in the new provisions.
However, when the recipient of the gift further transfers such digital assets, the gains shall be taxable under Section 115BBH at 30% (plus applicable surcharge and cess).
Here are a few examples to explain this in detail:
| Transactions | Taxable (Yes/ No)? |
|---|---|
| When R receives 100 crypto units (worth 1 lakh) as a marriage gift | No |
| When R spouse receives NFTs (worth 5 lakh) from father-in-law | No |
| When an individual receives gifts (in the form of VDAs) worth 3 lakh from their cousin | Yes on the entire value exceeding 50,000 at normal tax rates applicable. |
| When R gifts NFTs to her friends in the following transactions: | |
| Transaction 1 of 80 NFTs (valued at ?80,000) | Transaction 1 will be taxable (as it exceeds the limit of 50,000). |
| Transaction 2 of 20 NFTs (valued at ?20,000) | Transaction 2 will not be taxable. |
Applicable from the 1st of April 2022, the crypto income tax will be applicable to retail investors and traders earning income from VDAs including cryptocurrencies and NFTs. How will the new proposed income tax law impact you as an individual? Binocs is here to assist you. Register on our crypto portfolio tracker platform to know more about applicable crypto tax.
Download our 2022 Virtual Digital Assets Tax Guide to know more.
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