Taxation in Crypto World! Your loss is your loss and Your gain is Government's Gain!

Arjuna (Fictional Character): Krishna, Honourable Finance Minister Mrs. Nirmala Sitharaman had declared the Finance Budget of 2022-23 on 01^st February in the Lok Sabha. And this year the government decided to tax Virtual digital assets (VDA) so what was the reason behind doing this?

Krishna (Fictional Character): Arjuna, in recent year there were lot of people dealing in Virtual digital assets (VDA) and there were ambiguities over-taxation of virtual assets among the traders, hence in this budget government has clarified about taxation of Virtual digital assets (VDA) and RBI(Reserve Bank of India) will be bringing its own virtual currency known as CBDC (Central bank digital currency).

Arjuna (Fictional Character): Krishna, what are virtual digital assets (VDA)?

Krishna (Fictional Character): Arjuna, virtual digital assets (VDA) refers to any digital representation of value that can be digitally traded, transferred, or used for payment whether generated through code, cryptographic means. Virtual assets are not only limited to Cryptocurrencies but also include NFT’s and ETF’s etc.

Arjuna (Fictional Character): Krishna, so what are the changes brought in the current budget for cryptocurrencies?

Krishna (Fictional Character): Arjuna, Section 115 BBH, throws light on taxation of Virtual digital assets (VDA) let us see the changes in the following way:

PART A: Taxation on transfer of Virtual digital assets (VDA){other than gifts}

1. The government has decided to tax Virtual digital assets (VDA) @30%.
2. No set off will be available against losses from Virtual digital assets (VDA) against any other head of the income.
3. Losses from Virtual digital assets (VDA) cannot be carried forward to next year.
4. No expenses shall be allowed as deduction except cost of Acquisition.
5. The above provisions shall be applicable from FY 01-04-2022

For eg: Mr A who is a trader in crypto currency and bought computer for crypto trading and the following are the transactions carried on by him: Purchase

1. Coin A at Rs 5,00,000
2. Coin B at Rs 2,00,000
3. Coin C at Rs 1,00,000

Sales

1. Coin A at Rs 8,00,000
2. Coin B at Rs 4,00,000 and
3. Coin C at Rs 10,000.

Depreciation and other expenses amount to Rs 1,00,000 then he will be liable to pay tax @ 30% on Rs4,10,000 (12,10,000-8,00,000) and expense incurred of Rs 1,00,000 on earning this income shall not be allowed as deduction.

Part B: Applicability of TDS u/s 194S

The Finance Bill has introduced a TDS rate of 1% on each transaction of Virtual digital assets (VDA) but the provisions of such section are still unclear, so we need to wait for further clarification from the government.

Part C: Taxation of Gifts of Virtual digital assets (VDA)

Government has decided to tax the gifts of Virtual digital assets (VDA) @30% and Virtual digital assets (VDA) is included in the list of property defined in Sec 56(2)(x).

For eg: If Virtual digital assets (VDA) is transferred to friend then it will be taxed @30% but if Virtual digital assets (VDA) is transferred to relative the tax shall be exempt.

Arjuna (Fictional Character): Krishna, does this make cryptocurrency legal in India?

Krishna (Fictional Character): Arjuna, mere taxing of any income does not make that income legal in India and this topic is still under deliberation so we need to wait for further clarification from Government of India.

Arjuna (Fictional Character): Krishna, what should one learn from this?

Krishna (Fictional Character): Arjuna, it will be good to say that if any person is having unrealised gains then it will be beneficial for him to book his gains before 1-4-2022 whereas if the person is having unrealised loss then he may sell it after 1-4-2022. The government might also started reporting Crypto transactions in AIS (Annual Information Statement) so every income must be properly disclosed while filing Income tax return and it is also being said that there will be a law on regulation of cryptocurrencies known as crypto Bill which is still under consideration. Not allowing carry-forward losses is harsh for taxpayers so government should think of providing some relief to taxpayers.