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The long awaited clarification on taxation of cryptocurrency has been brought in the Finance Bill 2022. Virtual Digital Assets (VDAs) will be taxed at 30%. VDAs mainly include crypto currencies, non-fungible token (NFT), etc. Prima facie, this excludes digital gold, central bank digital currency (CBDC) or any other traditional digital assets, and hence aimed at specifically taxing cryptocurrencies.

The VDAs will be taxed at a special rate of 30% of the gain on sale of such assets. Benefit of basic exemption limit is also not available. No deduction in respect of any expenditure other than cost of acquisition shall be allowed. Also, TDS at 1% shall be deducted on the transaction value from 1 July subject to certain conditions.

Let’s decode the above provision with some examples. Ram Kapoor acquired cryptocurrency A in July 2020 for 5,000. Suppose, Ram transfers this cryptocurrency A for 65,000 in August 2022 and TDS deducted is 650. The gain will be determined as 60,000. Tax at 30% plus cess will be payable i.e. 18,720. Of this, 650 TDS has already been deducted. Hence, balance tax payable in this transaction will be 18,070.

It is pertinent to note that the above announcements made in the Finance Bill are progressively applicable from 1 April onwards. Assume that the crypto currency A is valued at 45,000 as on 3 February. Ram should transfer the crypto currency A at 45,000 and book profit of 40,000.

Considering it as short term capital gain for the FY 2021-22, the tax will be payable for this transaction based on slab rates. Assuming total income of Ram is within the basic exemption limit of 2,50,000, no tax is payable on this transaction. If he wants to continue holding the crypto currency A, Ram must acquire it again at the prevailing price of 45,000. Now as in above example, suppose he transfers this crypto currency A for 65,000 in August 2022 and TDS deducted is 650. The gain will be determined 20,000. Tax at 30% plus cess will be payable i.e. 6,240. Of this, 650 TDS has already been deducted. Hence, balance tax payable in this transaction will be 5,590. Hence, Ram is able to save tax of 12,480.

The loss on transfer of VDAs will not be set off against any income. Gains on crypto cannot be set off against loss on shares. Also, crypto losses will not be eligible for carry forward to subsequent years. While there is some debate on this, my interpretation is that the ban on set off also extends to adjustments between crypto trades. For instance, Govind transfers crypto currency X at a gain of 50,000 and in the same year he transferred cryptocurrency Y for a loss of 35,000. He believes that he must pay tax on net gain of 15,000 only. This belief of Govind is not correct. Tax on gain of 50,000 is payable at 30% plus cess. The loss incurred on transfer of crypto currency Y cannot be set off or carry forward. TDS is to be deducted on the transaction by the transferee form the payment consideration if the value of the transaction exceeds 10,000. For certain specified person this limit is increased to 50,000. These specific person include :

(i) Individual or HUF with any income other than income from business / profession

(ii) Individual or Hindu undivided family with :

a. business turnover less than less than 1 crore

b. professional fees less than 50 lakh

For example, Sampad transfers crypto currency B to Asif for 48,500 on 6 June 2023. Asif is salaried person and does not have any income from business / profession. Hence, he is specified person as per condition (ii) stated above. Accordingly, he is not required to withhold TDS from the amount payable and he can make the full payment of 48,500 to Sampad.

It is pertinent to note that the TDS provision is applicable even where consideration is wholly / partly in kind or in exchange of another virtual digital asset.

Nitesh Buddhadev is founder of Nimit Consultancy.

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