The Ultimate Guide to Tax on Digital Assets

A blog about how the government will tax income from digital assets. The article aims to clarify all your doubts about the tax on digital assets.

Padmaja Choudhury   /   February 16, 2022

Have you invested in cryptocurrency? Are you confused about how much you need to pay tax to the government when you transact digital assets?

In the Budget 2022, the finance minister announced a 30% tax on profits from digital assets, among other announcements. This article will help you figure out the tax on digital assets. 

As per the government’s definition, digital assets include ready money like Bitcoin, application coins, privacy coins, stable coins, Non-Fungible Tokens (NFTs), governance tokens and other related coins and tokens.

However, we need to understand that taxing profits doesn’t mean that digital assets are legal. The government has mentioned that cryptocurrency would never be a legal tender, but the legality as an asset class is still unclear.

Tax on the income from digital assets   

The income from transferring virtual digital assets is subject to a 30% tax. This means that the same tax rate will apply to individuals across different income slabs. Moreover, the people whose total income is less than Rs.2.5 lakh and don’t file ITR might have to file ITR to show their income from cryptocurrency.

This tax on income would be computed after deducting the cost of acquisition, which might include the purchase price of the cryptocurrency, as well as transaction fees.

Like most investment options, the tax on capital gains is applicable when you sell digital assets.

Crypto investors cannot claim deductions to decrease their tax liability because of their earnings.

Cryptocurrency losses cannot be adjusted against other sources of income, such as real estate or salaries, and losses cannot be carried over to future years. However, it’s uncertain if profits from one type of digital asset may be used to offset losses from another.

If you use a foreign crypto exchange, a peer-to-peer marketplace like LocalBitcoins or mine your cryptocurrency, you have to pay 30% on your profits. However, experts feel miners might be able to deduct cost of acquisition expenses such as power, depreciation on mining computers, and so on.

It is to be noted that profits made from cryptocurrency transactions made before April 2022 will also be taxed as per the Central Board of Direct Taxes (CBDT) statement.

Tax on Gifts

The budget also announced that digital assets received as gifts would also be taxed.

In addition to the digital assets received from another individual, such as a friend or relative, free cryptocurrency got through airdrops, learn-to-earn schemes, and play-to-earn games will be treated and taxed as gifts.

However, gifts made to specific relatives or on particular occasions are free from taxation under the Income-tax Act of 1961, regardless of the size of the gift. Gifts from parents, siblings, and other relatives, for example, are tax-free. Gifts received at weddings, via a will or inheritance, or in anticipation of the donor’s death are likewise excluded from income tax, regardless of their value.

In the hands of the individual, however, a gift received from a friend over Rs. 50,000 on the occasion of a birthday will be taxable.

The question now is whether the same gift taxation regulations that apply to physical assets would also apply to virtual digital assets. According to experts, the term ‘property’ under the Income-tax Act would be broadened to include virtual digital assets.

Individuals who got digital assets such as cryptocurrencies or NFTs as part of their pay package will be subject to a 30% tax since they will be considered a “gift” under the new tax law, rather than pay or employee stock options (ESOPs). 

Even if the employee has not sold the coins, they will be obligated to pay the tax during the assessment year. Not only that, in many situations, employees may be required to pay tax on higher sums even if the value of the coins has declined since they received them.

1% TDS

Besides the tax on income and gifts, the government imposed a 1% TDS on all transactions.   

Crypto exchanges will be required to withhold 1% TDS for most transactions starting July 1, 2022, under the new section 194S of the Income Tax Act. It will make sure that the government knows about all crypto transactions.

It is like charge on a remittance or sending an IMPS to someone else.

Let us consider an example. If a trader conducts ten transactions each day for Rs. 10 lakh, it will cost them 10,000 rupees multiplied by ten transactions for a total of Rs. 1 lakh rupees. However, trading within the site is not subject to a 1% TDS.

This TDS may apply only if the total amount of crypto transactions in a year exceeds Rs. 50,000 for the following sections of people:

  • Individuals or Hindu Undivided Families (HUF) with annual sales/gross receipts/turnover above Rs. 1 crore
  • Individual professionals with a yearly salary of more than Rs. 50 lakh
  • Individuals or HUFs who do not have a source of income from a job or a business

For others, this TDS may apply if the total amount of crypto transactions in a year exceeds Rs. 10,000.

However, as crypto trading takes place on a global level, there is no clarity if they would deduct the TDS if the transaction occurs between an Indian buyer and a foreign seller.

Conclusion:

Taxation of digital assets such as cryptocurrency is an intriguing topic and one that’s going to become even more relevant as the industry continues to expand.

In today’s blog, we shared everything you needed to know about taxation on digital assets.

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