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If you are among the 2 crore people who have invested more than $6 billion in cryptocurrencies, chances are that you are worried and seeking advice on taxation.

From 1 April, a flat 30% tax will be levied on the transfer of virtual digital assets (VDAs) or crypto assets. Along with this, a 1% tax deducted at source (TDS) will be applicable on each transfer of such assets. However, the TDS provision will get active from 1 July onwards.

Notably, starting from 1 April, set-off and carry forward of loss will not be applicable on crypto investments. To be sure, the cost of acquisition is allowed as a deduction in crypto investments.

Transfer of crypto

The government says there will be tax implications on transfers of crypto. This means that no tax will be applicable even if the crypto that you hold grows from $1 to $1,000, and you don’t realize the gains. Section 2(47) in the Income-Tax (I-T) Act has defined the transfer of capital assets in detail. A transfer happens when you sell the assets or give away your rights over it to someone.

“Further, if a crypto exchange extinguishes your crypto just like in cases of share buyback, it is also considered a transfer. Moreover, if you swap one crypto token for two tokens of the same value, even that is considered a transfer. In these cases, a flat 30% tax will be applicable," said Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm.

 

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However, no tax will be levied if you transfer crypto to your personal wallet. Tax experts warn that transferring crypto below the fair market value will invite tax incidence on the receiver. For example, if someone sells bitcoin at $1,000 against the current price of $40,000, the receiver will be taxed as per the gifting provisions of the I-T Act.

Crypto as salary

There are instances where individuals get compensation in crypto for providing services. For individuals receiving crypto, there will be two legs of taxation.

“There is not enough clarity around the taxation of transactions where cryptos are received in exchange for goods or services. If someone is receiving cryptos as remuneration or as payment for services rendered, it could potentially lead to the receipt getting taxed as salary or freelancing income. And further tax may apply when the cryptos are sold and converted to fiat, which is the newly introduced 30% tax." said Archit Gupta, founder and CEO, Clear.

As per Gupta, in a situation where the payer or the employer transfers cryptos as remuneration, they could also face the 30% tax. The situation gets further complicated if one of the parties is a non-resident in India for tax purposes.

Gifting of crypto

As per the new government rules, crypto assets are proposed to be considered as ‘property’, and therefore, gifting of crypto will be taxable in the hands of the recipient if the value exceeds 50,000 within a financial year. For example, if you receive 51,000 as crypto, then the whole amount would be added to your income and taxed as per the slab rate.

However, if crypto is received from specified relatives, it will not be taxable. As per rules, certain close relatives are exempted from receipt of the gift. Also, any gift such as crypto or money received on the occasion of marriage from non-relatives is also exempt from tax.

Airdrops and NFTs

As per Investopedia, an airdrop is a marketing strategy that involves sending coins or tokens to wallet addresses in order to promote awareness of a new crypto token. Keep in mind that such airdrops will attract tax as per Indian government laws.

“Airdrops could be considered as gifts and will be taxable in the hand of the recipient. NFTs may be treated similarly," said Gupta. So, for example, if a creator sells an NFT for 1 lakh, he or she will have to pay tax at a flat rate of 30%.In both these instances, the process to calculate the fair market value has not been provided yet.

Tax advice for FY22

While the tax proposals for crypto are effective from 1 April, there is some uncertainty about the same for the just-concluded fiscal.

Maheshwari suggests filing taxes on crypto investments as per the latest taxation laws. “The law is obviously applicable going forward and it’s not a retrospective tax. But what we are advising clients is to file tax as per the latest laws. There are certain contentious conditions such as set-off of losses, which might get challenged later."

Experts suggest that since crypto taxation is being implemented for the first time, individuals should consult a tax expert before filing returns.

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