30% Tax on gains made from Cryptocurrencies in India


The Indian government has proposed a new tax system for cryptocurrency investors, requiring them to pay a 30% tax on their cryptocurrency gains.

One of the biggest announcements in the Budget 2022 speech of the Finance Minister, Nirmala Sitharaman, was to impose a tax at the rate of 30% on the profits made from virtual digital assets (including cryptocurrencies).

The Budget 2022 also defined Virtual Digital Assets as:

  • 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 functioning as a store of value or a unit of account, including its use in any financial transaction or investment, but not limited to investment schemes; and can be transferred, stored, or traded electronically.
  • a non-fungible token or any other token of similar nature, by whatever name called;
  • any other digital asset, as the Central Government, may, by notification in the Official Gazette specify:

Taxation on Cryptocurrency in India – Budget Highlights

Below are the key highlights of Budget 2022 w.r.t. taxation on cryptocurrencies-

  1. Irrespective of the tax slab applicable on the assessee, a flat 30% tax is levied on gains made on the sale or transfer of cryptocurrencies.
  2. No benefit of indexation will be given in computing tax on gains.
  3. No set-off of losses or gains made from Virtual Digital assets is allowed with other sources of income or loss.
  4. Unlike other losses, losses made from the purchase and sale of Virtual Digital Currency cannot be carried forward.
  5. All Digital virtual assets will be treated as “property” for the purpose of gifting and will be taxable at the rate of 30% in the hand of the recipient. No exemption will be given to any recipient.
  6. A 1% TDS will be also be levied from July 1 2022 subject to certain conditions.

Examples

Let us understand the above provisions with the help of some examples-

Example 1. Aditya purchases cryptocurrency X for Rs. 5,000 in August 2019. He sold the cryptocurrency for Rs. 40,000 in the month of September 2022. A TDS of Rs.400 was deducted on such a sale.

 

Gain on Sale of Cryptocurrency X = Rs. 35,000

Tax on Gain @ 30% plus cess = Rs. 10,920

TDS already deducted on sale = Rs. 400

Net tax payable by Aditya = Rs.10, 520

 

Example 2. Arun makes a profit on the sale of cryptocurrency Z of Rs. 75,000 in the year 2022-23. A TDS of Rs. 1,200 was deducted on such a sale. Also, Arun has incurred a loss of Rs. 1,50,000 in his business in the same financial year 2022-23.

As stated above, Mr. Arun cannot set off the gain made on the sale of Cryptocurrency Z with the loss made in his business. Thus, he is liable to pay tax at the rate of 30% plus 4% cess on the gain of Rs. 75, 000.

Therefore, Arun has to pay a tax of Rs.22, 590. Now since a TDs of Rs. 1,200 has already been deposited, net tax payable by Arun should be Rs. 21,390.

Conclusion

The amendment is a welcome move to bring much-needed clarity over the taxation of cryptocurrencies in India. However, there are still many issues on which budget is silent like

  • The applicability of GST on Virtual Digital assets,
  • Tax on the creation or development of new Virtual Digital Asset,
  • The framework for transactions taking place between Indian Resident and Foreign Resident and FEMA implication
  • The role of online platforms facilitating dealing of Cryptocurrencies and other digital assets, etc.

Thus, we do hope that the government will soon come up with a holistic framework document, to clear all the doubts amongst investors.