The Finance Minister presented the Union Budget 2022 on Feb 1, 2022. Unless you invest in cryptos, there were no major announcements in the budget on the personal taxes front. Tax slabs and income tax rates remain unchanged. There is no change in the Section 80C limit.
A couple of minor changes:
- Government contribution to NPS Tier 1 accounts of State Government employees shall now be exempt up to 14% of basic salary (includes dearness allowance). Up from 10%. This brings parity with tax treatment for Central Government employees.
- Updated tax returns: Subject to meeting conditions, you are now allowed to revise income returns within 2 years from the end of assessment year.
- Surcharge on sale of any capital assets capped at 15%.
However, the big news is the introduction of tax on transfer of cryptos. There is a good and bad news. Let’s start with the bad news.
Crypto tax is here
The Budget refers to such assets as “Virtual Digital Assets”. Any kind of crypto asset including NFTs (Non-fungible tokens) shall be considered a “Virtual Digital Asset”. The definition is quite sweeping and clause 47A has been added in Section 2 to specify the definition.
Copying an excerpt from the Finance Bill.
‘(47A) “virtual digital asset” means––
(a) any information or code or number or token (not being Indian currency or foreign currency),
generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
(b) a non-fungible token or any other token of similar nature, by whatever name called;
(c) any other digital asset, as the Central Government may, by notification in the Official
Now, to the tax part.
#1 Tax of 30% on any gains from sale (transfer) of crypto assets (Section 115BBH)
No concept of short term or long-term capital gains. No linkage to holding period. No indexation benefits. Any gain from sale/transfer of crypto assets shall be taxed at 30%, irrespective of your income tax bracket. While calculating the gains, only the cost of acquisition shall be allowed ad deduction.
So, if you have mined a bitcoin, I believe the cost of acquisition will be considered zero and you will have to pay 30% on the entire sale consideration (whenever you sell it).
A complication here: Transfer from crypto exchange to your wallet (or from one wallet of yours to another) shall not be considered a transfer and no tax implication should arise. However, how do you prove to the tax authorities you transferred the bitcoin or any other crypto asset to your wallet or to somebody else’s wallet?
#2 TDS of 1% on sale of any crypto asset (Section 194S)
And this TDS is on sale consideration, not just the gain. Hence, if you invested Rs 2 lacs in Bitcoin and the value of your investment fell to Rs 1.25 lacs after a few months. Even though you have a loss of Rs 75,000, your sale transaction will be subject to a TDS of Rs 1,250. This makes things quite complicated. Clearly, this discourages high frequency trading in cryptos. Every time you trade, 1% of your capital will be stuck in TDS.
Crypto assets have one more complication. Unlike stock markets, you do not just buy or sell crypto assets in INR. You can exchange one asset for another. For instance, A has bitcoin and B has Ethereum (ether). A wants bitcoin and B wants Ether. They can simply trade the BTC-ETH pair. And since both A and B are selling a virtual digital asset, both are liable to pay TDS of 1%. Assume the exchange (at least the centralized ones) will take care of TDS.
As I understand, the crypto exchanges will ensure compliance with the TDS part. I am talking about centralized exchanges such as CoinDCX, CoinSwitch Kuber, and WazirX. Not sure how this will work if you are trading on a decentralized exchange. Perhaps, you will have to deposit TDS with the Government on your own.
TDS is applicable for transfers above Rs 50,000 (aggregate during the financial year). However, if you are professional and have business income, the threshold drops to Rs 10,000.
#3 No set-off permitted (Section 115BBH)
If you made losses from gain of any crypto assets, you cannot use the losses to set off income from any other head, including capital gains. Let’s say you made a net loss of Rs 2 lacs on sale of crypto assets in a financial year. You also made a gain of Rs 2.5 lacs on sale of stocks or any other capital assets. You can’t use this loss (from crypto assets) to set off capital gains. Therefore, despite this loss of Rs 2 lacs, you will have to pay capital gains tax on Rs 2.5 lacs.
Similarly, you may have made a gain of Rs 2 lacs on sale of crypto assets. And a capital loss of Rs 2.5 lacs on sale of stocks, mutual funds, gold or real estate. You will still have to pay 30% tax on Rs 2 lacs gain from sale of crypto assets.
#4 Carry forward of loss not permitted (Section 115BBH)
In case of capital assets like stocks, if you book a loss and do not have capital gains to set-off against those losses, you can carry forward the capital loss to the next financial year. This is some relief as the loss helps you reduce tax liability in the future. Unfortunately, no such relief for Virtual Digital Assets or crypto assets. If you have a loss on sale of a crypto assets, you can use this loss to set off gains from sale of the same or different crypto assets with in the same financial year (and reduce your tax liability). However, if you can’t do that in the same financial year, such loss will not be carried forward.
#5 Gift of crypto assets taxable in the hands of the recipient (Section 56)
As I understand, if you receive a crypto asset as gift from a relative, the received amount won’t be taxable. Definition of relative shall be as per Section 56 of the Income Tax Act.
However, if you were to receive a gift from a non-relative, any consideration in excess of Rs 50,000, shall be taxed at 30%. Note this limit of Rs 50,000 is cumulative and includes all kinds of gifts from all the non-relatives during the financial year. Not sure if TDS is applicable in case of gifts.
Where is the good news?
Well, now that the Government has specific how transfer/sale of cryptos shall be taxed, the chances of an outright ban of cryptos have gone down. Therefore, even though you may be disappointed with the proposed tax on crypto assets, this is far better than an outright, which seemed like a possibility only about a couple of months back.
Disclaimer: There are many aspects about the crypto tax rules (and my understanding of underlying blockchain technology is rather limited) that I do not have complete clarity about or may even have the wrong understanding. If you are investing in crypto assets, suggest you speak to a Chartered Accountant before taking any action.
Please understand introducing taxes on your income from cryptos does not make holding cryptos legal. We will get the clarity once bill regulating crypto assets is introduced and passed in the Parliament However, I believe this does reduce the chances of an outright ban on cryptos. Do this consider this post as a recommendation to invest in crypto assets including bitcoin.