Taxation of crypto currency was a very debatable and confusing topic until the hon’ble finance minister Smt. Nirmala Sitharaman while presenting the Finance Bill, 2022 on 1st February, 2022 introduced Crypto Tax.
Definition of crypto currency has now been included in the Income Tax which makes it very clear what would be considered as a Crypto Currency or digital asset. The government coined the term Virtual Digital Asset for crypto currencies and NFTs etc.
Further, in order to tax the profits arising our of crypto and NFT transactions, it has been made very clear in the Finance Bill, 2022 that income earned from the transfer of these Virtual Digital Assets shall be taxed @ 30% flat without any deduction, set off or carry forward of losses.
Heavy taxation coupled with TDS formalities shall make these transactions more complicated. A very strict view has been taken in this regard by the government. Lets discuss the taxation implications in details.
Taxation of crypto currency as announced in the Finance Bill, 2022 has three major aspects i.e. Transfer of crypto assets for consideration, Transfer of crypto assets for no consideration i.e. as a gift and Tax deducted at source (TDS).
You may also watch this video to get better understanding of the whole concept.
Definition [As per the Finance Bill, 2022]
In order to understand the aforementioned taxation aspects, first we should discuss what shall be considered as a crypto currency or NFT etc. Digital assets have now been defined under the taxation laws of the country. Here is the definition of crypto assets.
A new clause 47 (A) has been added in this regard. The relevant provisions as mentioned in the Finance Bill, 2022 are reproduced below:
(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.
It is very clear from the above definition that Crypto currencies, NFTs and other digital assets as may be declared by the central government shall come under the purview of Virtual Digital Assets.
Taxation of Virtual Digital Assets (Crypto Tax) [Section 115 BBH introduced in Finance Bill, 2022]
Firstly, in order to tax gains arising out of crypto or Virtual Digital Assets transactions, a new section 115 BBH has been included in the Act. Income/ Profit for transfer of Virtual Digital Asset to be taxed at 30 % flat. The mentioned section is reproduced below for better understanding:
Section 115 BBH:(1) Where the total income of an assessee includes any income from the transfer of any virtual digital asset, the income-tax payable shall be the aggregate of––
a) the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of thirty per cent.; and
b) the amount of income-tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause (a).
(2) Notwithstanding anything contained in any other provision of this Act,––
a) 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 this Act in computing the income referred to in clause (a) of sub-section (1); and
b) No set off of loss from transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any other provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.
It is understood from the above definition that:
- No deduction of any expenditure allowed except cost of acquisition of the digital asset.
- No loss shall be carried forward or set off against any other head.
As per the preliminary understanding, losses from Virtual Digital Assets can be adjusted against income from Virtual Digital Assets only and not from any other income such as income from business or profession, income from house property and salary etc.
Further, even if you have gain from other business, these losses shall not be deducted. For example, you run a business and at the same time trade in crypto currency. In the business, you made a profit of Rs. 10,00,000/- and from crypto trading incurred a loss of Rs. 5,00,000. No deduction of this Rs. 5,00,000 shall be allowed and the loss of Rs. 5,00,000 shall not be carried forward.
Virtual Digital Assets received a GIFT
Secondly, Virtual Digital Assets shall also be taxed when received as a gift. These assets are now covered under the definition of Property under section 56 of the Act. However, no tax shall be paid if the aggregate value of the crypto assets received as a gift does not exceed Rs 50,000. Otherwise, entire value of digital asset received as a gift shall be added in the income of the assesse under the head Income from other sources.
Further, on the basis of preliminary understanding, gift of crypto currency or any virtual digital asset of any value from any relative is wholly exempted.
TDS Payment on Transfer of Virtual digital asset [TDS @1%]
Lastly, as per the Financial Bill, 2020, tax shall be deducted at source on Virtual Digital Assets transactions subject to certain threshold limits. Section 194S has been introduced in this regard. Relevant extract whereof is reproduced below:
Section 194S: (1) Any person responsible for paying to a 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. of such sum as income-tax thereon: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, where there is no part in cash; or
b) 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 responsible for paying such consideration shall, before releasing the consideration, ensure that tax has been paid in respect of such consideration for the transfer of virtual digital asset
Therefore, TDS at the rate of 1 % shall be deducted on every transfer of crypto currency or any other Virtual Digital Asset and the same shall be deposited with the income tax department. The burden of deducting and depositing the tax is on the person paying the consideration which can be in any form cash, crypto currency or in kind.
It simply means reporting of these transactions will be mandatory which will give essential data of these transactions to the government. Further, this provision shall impose additional burden on crypto traders and investors in the form of payment of taxes irrespective of the any loss in the transfer of crypto currency or any other Virtual Digital Asset. In other words, a crypto trader or investor has to pay tax even if he is in loss in the transaction.
Threshold limits where TDS shall not be deducted
In the following two cases, person buying a Virtual Digital Asset shall not be required to deduct tax.
- Where the consideration is payable by a specified person (defined below) and the value or aggregate value of such consideration does not exceed fifty thousand rupees during the financial year; or
- 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.
Who are Specified Persons?
- 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;
- being an individual or a Hindu undivided family, not having any income under the head “Profits and gains of business or profession”.
Thus, No TDS formalities will be there if you have income from salary, house property, capital gain and other income and aggregate value of consideration paid in lieu of Virtual Digital Asset(s) is lower than or equal to Rs. 50,000 in a financial year. You can trade upto Rs. 50,000 of Virtual Digital Assets without paying TDS. It does not mean you do not have to pay taxes on profits arising from trading/investment in Virtual Digital Assets. Taxes on profits shall be levied at 30% as mentioned above.
Further, specified persons are not required to obtain Tax Deduction Account Number or Tax Collection Account Number (TAN). The specified persons are exempted from section 203A and 206AB which has the requirement for obtaining TAN and deducting tax at higher rate, respectively.
Thus, if you are a specified person, need not worry about TDS deduction and payment.
It is not yet clear who is going to pay TDS in case the trading and investment is being done over a crypto trading platform. Lets wait for clarifications from the Income Tax department in this regard.
These provisions shall be applicable from 1st April, 2022. Thus, the stakeholder may plan their taxes accordingly. Contact us for more queries and concerns