India’s cryptocurrency tax kicks in from April – here’s what investors need to know

• Beginning April 1, a 30% tax will apply to all forms of virtual digital assets (VDA), or crypto assets, that are sold at a profit.
• A 1% TDS will be held back each time you sell a crypto asset, and will be set-off against the crypto tax at the end of the year.
• The crypto tax cannot be set-off against other business expenses.
• India’s Finance Minister has reiterated that the existence of a targeted tax does not give crypto ‘legal status.’

From April this year, cryptocurrency gains will be taxed at 30% – which is the highest tax bracket, and the same rate as lottery winnings. This would apply to all “virtual digital assets,” right from Bitcoin to NFT and related earnings. By contrast, the tax rate on stock trading can range from zero (if filed as business income based on tax slab) to 15% (if filed as short-term capital gain).

A tax rate on par with the lottery is the tip of the iceberg though, and crypto investors will need to be aware of other provisions as well, to remain on the right side of the law in the financial year 2022-23.

India is said to have almost ten million cryptocurrency users, seeing about $100 billion in trading volume in 2021. By the calculations of the founder of WazirX, an Indian crypto exchange, that could yield $100 million (or ₹ 750 crore) additional income tax in a year.

Taxing crypto: Direct tax provisions in the Budget

Firstly, all crypto profits gained over the course of the year will be taxed at a flat 30% rate. So for example, a person who buys a crypto asset at ₹10,000 and sells it at ₹12,000 would show a profit of ₹ 2,000 and pay 30% tax, which is ₹600.

A person who bought a crypto asset that increased in value greatly, but is yet to sell it, by definition has made no profits yet. Such crypto asset holdings where one has not ‘realised’ the gains, will not qualify for tax until some portion of it is sold.

Similarly, after accounting for all crypto transactions made across the year, if one is in loss overall with no profits made, there will be no tax to pay.

Tax deduction at source (TDS): Nibbling away at the capital

The government has mandated at 1% TDS on all crypto transaction redemptions, to be deducted presumably by the crypto exchange one uses. That means the TDS is deducted upon the entire transaction value even if you make a loss.

For example, if you had bought Bitcoin worth ₹40,000 and sold it at the same price without any profit, you would get back only ₹ 39,600. If you then invest the same ₹ 39,600 into buying Ethereum or NFTs, and again sell at no profit, you would again lose 1% to TDS and get back only ₹39,204. This TDS collected can be set-off against the total income tax owed at the end of the year.

Collecting 1% upon redeeming proceeds of every single trade would deplete available capital fast, as noted by Nithin Kamath of the Zerodha trading platform. An investor who begins with any amount of capital, but makes almost zero profits overall due to market movements, will be left with only 50% of what they started with by their 69th trade, and only 25% by their 138th trade.

This effect of making people think twice about whether a prospective trade is truly worth it, and thus clamping down on speculative trades could be intentional. As pointed out by experts, this TDS could steeply reduce the volume of crypto trade in India, once it is implemented in July 2022.

The reason for this, is the opportunity cost imposed by locking up money for upto a year, until tax returns are filed for refunds. Note however, the income tax department could refund the entire TDS deducted over the course of the year, if a person’s tax returns can prove an overall loss in crypto trade.

Additional provisions that close loopholes

Persons who earn all or most of their income from crypto assets, can show their earnings as business income. However, no business expense deductions will be allowed upon crypto earnings, making this route unattractive.

Avoiding the 30% crypto tax, and showing crypto profits as capital gains which is taxed at upto 20% plus surcharge, will not be allowed either.

As for cryptocurrency mining, the government is mulling over whether to tax the activity as a goods or service, to bring it into the fold of GST. The government also wants to make crypto trade on foreign crypto exchanges subject to GST.

Professionals and business-people will not be able to set-off gains or losses between their primary income and crypto income.

Crypto-based prizes and gifts will also be subject to the 30% flat tax. So ‘airdrops’ of coin or NFT won’t be free. Receiving crypto assets as a gift won’t be free either, with the option of deducting tax at source.

Contrasting with current year’s tax provisions for crypto

Until the Union Budget 2022 was presented, India did not have special provisions for crypto earnings. So until the end of March 2022, most people who profitably cashed out of their crypto holdings are likely to show that as a short-term capital gain (STCG) and pay the appropriate rate of tax.

Until the current fiscal year, employees, students and senior citizens whose overall income added up to less than the minimum tax threshold (₹ 2.5 lakh) were tax-free. But now with a targeted crypto tax, it isn’t clear if those earning less than the tax threshold will still need to pay tax on their crypto income.

For the period ending in March 2022, tax filings by crypto investors can still show business expense deductions. However, those who are liable for advance tax payment will have to move fast. The last day for paying advance tax is 15 March 2022, and delaying would add an interest of one percent of the tax owed, for each month’s delay.

While the tax rate on crypto stands at a flat 30% for the year 2022-23, the tax rate upon stock trading can range from zero (if filed as business income in zero tax slab) to 15% (if filed as short-term capital gain).

Legality of crypto is not assured by the targeted tax

Making herself clear, India’s Finance Minister Nirmala Sitharaman said even though crypto isn’t regulated yet, the upcoming tax provisions do not give it ‘legal status.’ She said the country is simply invoking its ‘sovereign right’ to tax transactions. Moreover, a high court ruling has previously made it clear that income tax is applicable to all income, whether earned ‘legally’ or not.

The proposed framework for regulating crypto is yet to be presented in Parliament, but the finance ministry is said to be working on a consultation paper, which is expected to be released for public comments in six months.

Disclaimer: This is not intended to be financial advice. We recommend making any major decisions after speaking to your tax consultant. Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.

SEE ALSO:
Adani group, IOC, BPCL, HPCL, Reliance, HDFC and other hot stocks on March 21
The powerhouse behind Bored Ape Yacht Club has launched its own token, ApeCoin