Ten things to know about crypto taxation

Photo: iStock
Photo: iStock


The proposals in the Budget do not imply that crypto assets have gained legal tender status

The government has for the first time provided definition for crypto assets and set out a list of proposals on the taxation of this new asset class. The budget proposes that gains arising out of these virtual digital assets will be taxed at a flat rate of 30% irrespective of the individual’s income tax slab rate. In addition, a 1% tax deducted at source (TDS) will be applicable on transfer of such assets over a certain threshold.

While the blanket 30% tax in itself is a big negative for crypto investors, the government has also proposed that losses from crypto assets cannot be set off against any other income.

Tax experts, Tapati Ghose, partner, Deloitte India; Naveen Wadhwa, deputy general manager, Taxmann; Sandeep Jhunjhunwala, partner at Nangia Andersen LLP; and Amit Singhania, partner, Shardul Amarchand Mangaldas & Co answer 10 key questions on crypto taxation. Edited excerpts:



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How will crypto assets be classified now?

Wadhwa: The government did not clarify if digital assets will be a currency, commodity, or security. In the absence of any such clarification, the virtual digital asset should be classified as a capital asset. Therefore, crypto assets should be deemed capital assets if purchased for investments. Therefore, any gains arising on the transfer of such asset shall be taxable as capital gains.

Do budget proposals legalize crypto assets?

Ghose: The proposals have introduced a scheme for taxation of income arising on transfer of digital assets. This does not mean that cryptocurrencies have gained legal tender status. Legality under relevant regulatory provisions has to be provided.

How TDS on transfer of crypto aseets will work?

Wadhwa: A new Section 194S has been inserted in the Income-tax Act for the deduction of tax from the payment of consideration for the transfer of digital assets. Tax is required to be deducted at the rate of 1% of the consideration. The rate shall not be further increased by surcharge and health and education cess. If the deductee does not furnish his PAN to the deductor, the tax shall be deducted at the rate of 20% as prescribed under Section 206AA.

What are the exceptions under the TDS rule for crypto?

Ghose: No TDS is applicable if the payer is the specified person (an individual or Hindu Undivided Family, who is not subject to tax audit) and aggregate value of consideration is less than 50,000 during the financial year. In other cases, no TDS is applicable if the consideration does not exceed 10,000 in aggregate during a financial year.

Is TDS applicable if assets are moved to personal wallets?

Jhunjhunwala: There should not be any TDS on transfer of assets to a personal wallet from a crypto exchange or between personal wallets as normally TDS is applicable only when the investor receives any consideration in exchange of any of these transfers.

Can profit in bitcoin be set off against losses in ether?

Singhania: While crypto investors won’t be able to set off losses in other assets, one-to-one correlation can be made between the sale and purchase of each cryptocurrency within the same financial year.

If I pay for a pizza using bitcoin, will the TDS be applicable?

Jhunjhunwala: As per the proposed TDS provisions, any person responsible for paying to a resident any sum by way of consideration for transfer of virtual digital assets is under an obligation to deduct tax at the rate of 1%.

By the plain reading of crypto provisions, the way it written in the Budget, the pizza seller would have to submit 1% TDS to the government. More clarifications are needed from the government on this front.

How will crypto tax apply to NRIs or foreign individuals?

Ghose: A non-resident is taxed in India on income that is received or deemed to be received in India or accrues or is deemed to accrue and arise in India. The place of receipt of the consideration on transfer of digital assets will assume significance and have to be clarified. Further, income deemed to accrue in India includes income through or from any property or asset in India, or through the transfer of a capital asset situated in India. Location of the digital assets in the case of a non-resident can be a matter of controversy given the virtual exchange environment. The suitable guidelines on the same need to be notified.

Will surcharge and cess apply to those above 50 lakh income?

Ghose: Yes, surcharge will be applicable on the tax computed on transfer of digital assets where aggregate income is in excess of 50 lakh. Cess will be applicable in all cases.

What are the rules for gifting to relatives and non-relatives?

Ghose: Gifting of digital assets will be taxable in the hands of the recipient if the value of assets exceeds 50,000. However, in case these are received from relatives as defined, the income will not be taxable. Guidance is awaited on valuation of such assets.

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