Taxation of the Cryptocurrency

The much-awaited clarification on the taxation of the cryptocurrency was announced in the Union Budget 2022 on February 1. The government proposed in the budget that any income from transfer of any virtual digital asset (VDA) which includes crypto currencies, non-fungible token (NFT) will be taxed at 30%. Further, the benefit of basic exemption limit of Rs 2.5 lakh is not applicable. No deduction in respect of any expenditure other than cost of acquisition shall be allowed. If the transfer of VDA results in a loss, such loss can't be set-off against any other income, nor shall such loss will be allowed to be carried forward to subsequent tax years. A 1% tax deducted at source (TDS) will be levied on any payment made in relation to transfer of the VDA and gifting of virtual digital assets will be taxed in the hands of the recipients.  

While the proposal of 30% tax may not be good news for many young Indians who have massive interest in crypto given its ability to give higher returns albeit at a higher risk. The budget announcement at least provides some clarity on the crypto which is currently not regulated in India.

Interestingly, post budget there have been widespread debates and discussion that announcement of the tax aspect is a first step of legitimizing the industry but fierce resistance from the Reserve Bank of India (RBI) continues. Further, the Central Board of Direct Taxes (CBDT) exclusively stated post budget that taxation should not be akin to legal status. The taxation and imposition of TDS on crypto will help to understand the penetration across investors in the country and track the quantum of business according to CBDT.  Along with the clarity of taxation, investors should beware of the risk factors and most importantly comply with the tax laws. Investors need to report relevant crypto currency transactions and income from it while filing of the income tax returns (ITR) just like they do in case of other assets.  Non-reporting of such transactions can cause discouraging consequence such as penal action or risk of prosecution.

Filling of the ITR for cryptocurrency prior to budget:

The provision of taxation on the digital assets will be applicable from April 1, 2022. Till date gains from the crypto were declared either as 1) Business income or 2) Capital gains depending on the nature of transactions done.  

• Business income – If cryptos are held as stock-in-trade and same is reflected in the higher volumes and frequency of trades then the income is categorized as ‘Business income’. This income will be taxed as per the applicable tax slab and calls for maintenance of books for the purpose of tax audit. The prescribed form for having income from profits and gains of business or profession is ITR-3 and transaction need to be reported under Part A -Trading account under "Sale of goods". As the transaction is considered as business income, the Good and Services Tax (GST) implication also needs to be examined.    
• Capital gains – If cryptos are held as an investment then sale of cryptocurrency is to be classified under 'Capital Gains / Loss'. Capital gain in event of sale value of the transaction is more than the cost and capital loss if the purchase price is less than the sale value. Further, depending on the holding period the gains/loss is classified as long term (more than 36 months) and short term (36 months or lower).  Long term capital gains are subject to tax at 20% and the indexation benefit is available while short term capital gains is tax at the applicable personal taxation rates.  Capital gains will be reported in the CG schedule of the applicable ITR form.

Other crucial aspects that investors should keep a note of:

• If a taxpayer is holding crypto and have taxable income exceeding Rs 50 lakh then he/she has to fill in Schedule - AL containing details of Assets & liabilities.
• Since there is no clarity on whether crypto is an Indian or foreign asset. Classification is done on the basis of the exchange through which investor is trading the issued digital asset. If the crypto is issued by exchange in India, then it is Indian asset. If it is issued by the exchange which is outside of India then it is considered as foreign asset and needs to disclosed Schedule FA (Details of Foreign Assets and Income from any source outside India).
• Losses made from the crypto assets can be set off against other sources of income or carry forward in the subsequent 8 years against earnings from capital gains.
• Non reporting of all the aforementioned transactions attract notice of assessment and huge amount of penalty under different provision of the Black Money Act.

Filling of the ITR for cryptocurrency post budget:

Soon after the budget, Revenue Secretary Tarun Bajaj said that next year ITR forms will have a separate column for making disclosures regarding crypto and payment of the taxes.  While there are many aspects which calls for more clarity, the prime facie indicates that flat tax rate of 30% is applicable on transfer of any virtual digital asset in the new fiscal year.

TDS will be applicable on any transfer of VDA.  If the specified person and value of consideration is less than Rs 50,000 during a financial year. A specified person can be individual or Hindu undivided family whose turnover from the business does not exceed Rs 1 crore or turnover from profession does not exceed Rs 50 lakh.  A specified person can also be individual having income under any head other than the head ‘Profits and gains of business or profession. For others the said limit is proposed at Rs 10,000 in a financial year. While the rule of TDS can impact the volumes but we still await more clarity on how this will be implemented as operationally it could be challenging given the complex and large volume of the crypto transactions.

Another crucial change proposed in the budget is no losses can be carried forward and no set-offs will be allowed with respect to other sources of income. The gains or losses can be set-off only against digital assets profit/loss in a financial year.

Summing up

There is immense craze for cryptocurrency among young investors in India. Quick superlative return is the prime attraction associated with crypto without much significance given to the fact that it is not regulated and highly risky. In the latest development, the Supreme Court of India has asked the central government on February 25, 2022 to make its stand clear on crypto. The imposition of the taxes is discouraging for many crypto investors and whether investor should book gains/losses before March 31, 2022 is something they need to examine themselves and consult a tax expert. More clarity and further guidelines from the policy makers on the new rule is still awaited which can help investors to plan the way ahead better. Till then in the next fiscal year whether the investors move to other asset classes or find ways and means to reduce the tax outgo is something we need to wait and watch. Seek an advice from a tax consultant, do relevant disclosures, pay the taxes and comply with the tax laws to avoid any tax litigation in the future.