India’s proposed Crypto tax

Early this year, India joined the list of crypto tax jurisdictions nations. In January 2022, during the budget announcement, Finance Minister Nirmala Sitharaman placed earnings from virtual digital assets (VDAs), including cryptocurrencies and non-fungible tokens (NFTs), in India’s highest tax band 30 percent. Additionally, offsetting the losses from their sale against other incomes won’t be allowed. In another regulatory move, the government introduced a one percent Tax Deducted at Source (TDS) on digital assets. The proposed crypto tax would be under new Section 115BBH and applicable from Assessment Year 2023-24. As a result, all income from crypto transactions in FY 2022-23 will be applicable.

The total number of crypto owners in India now stands at 10.07 crore - the highest in the world. The United States has 2.74 crore crypto owners, Russia (1.74 crores), and Nigeria (1.30 crore).

According to Gartner, a digital asset is anything stored digitally and is uniquely identifiable that organizations can use to realize value. Examples of digital assets include documents, audio, videos, logos, slide presentations, spreadsheets, and websites.

In this context, VDAs would include cryptocurrencies, DeFi (decentralized finance), and NFTs. However, this excludes digital gold, central bank digital currency (CBDC), or any other traditional digital assets and hence is aimed at explicitly taxing cryptocurrencies. The Digital Rupee, an RBI-backed CBDC to be launched in 2022-23, will be exempted from the proposed crypto tax.

However, the government’s definition of VDAs is dynamic enough to cover any new product that comes into being due to technological changes. This is to protect the fast-paced transformation seen in the cryptocurrency space.

If an investment of ₹ 100000 on crypto is made, and it is sold at ₹ 125000, the investor will have to pay the tax on the profit which is ₹ 25000 rather than paying tax on the total amount. This 30 percent tax on profit also considers a 1 percent TDS deposited by the facilitator, exchanges, or a person responsible for paying the consideration on every crypto transaction. There will also be 30 percent taxation on the receiver of crypto gifts.

The tax calculations will also ignore any other income earned by the taxpayer from another source of income while calculating the income from VDAs. This source cannot be combined with any other source of income. If the net income from this source is positive, the same amount shall be chargeable to tax at the rate of 30%.

Investors won’t be able to counterbalance the losses arising from the transfer of VDAs against any other income. Also, they won’t be able to carry it forward.
So, for example, if a loss of “A” is incurred from investments in VDA and a profit of “B” is earned elsewhere, investors won’t be able to claim that they would pay a tax on B-A.

Not just VDA investors, those who have received airdropped crypto tokens or NFTs as gifts will have to pay tax too. An airdrop involves sending coins or tokens to wallet addresses to promote awareness of a new virtual currency. Small amounts of the new virtual money are sent to the wallets of active blockchain community members for free or in return for a small service, such as retweeting a post sent by the company issuing the currency. Airdrops involve crypto projects sending free tokens en masse to their communities to encourage adoption.

One noteworthy point is that only gains will be taxed. Losses will not be taxed. Also, investors will have to pay tax only when they earn an income from transaction, transfer or exchange, or crypto or other virtual digital assets. No tax is to be paid for holding crypto.

The proposed tax won’t be restricted to just cryptocurrencies, but anything that could be defined as a virtual digital asset and has an underlining value. This might affect in-app purchases by social media companies dating and gaming apps. Social media giants such as Meta, dating apps, or even gaming apps could face tax consequences. As mentioned earlier, these could be covered under the government’s broad definition of virtual digital assets.

The finance minister also clarified that the imposition of tax on income from VDAs doesn’t mean an acknowledgment of them being legal. More clarity on the legality of crypto is expected in the upcoming bill.

Time will tell whether this move from the government proves to be a boon or a bane for the crypto community in India.