Budget Explainer: How Will The Crypto Tax Work?
Cost of computation, set-off provisions, treatment of gift, March 31 vs April 1—here's how the crypto tax will work.
If there’s one subject that’s caught the public imagination from the budget this year, it has to be the tax on cryptocurrency assets, or as the Finance Bill 2022 calls it, Virtual Digital Assets.
And like most things tax, the provisions on crypto assets too have practitioners divided. Without going into the interpretation issues, here’s what the provisions say:
All types of cryptos and non-fungible tokens are covered, namely assets that stores value like Bitcoin, utility based tokens like Ethereum. Excludes Indian currency or foreign currency. Government empowered to include or exclude any digital asset from the definition of VDA.
Any income from transfer of a VDA will be taxed at 30%.
VDAs as a gift- the receiver will have to pay tax @ 30%.
No deductions allowed except cost of acquisition.
Tax deducted at source @ 1% - if payment of more than Rs 50,000 is made to an Indian resident for transfer of VDA, payer has to deduct 1%.
These seemingly simple provisions have given rise to a lot of questions. In this explainer, we’ve attempted to clarify some of those.
Does the Finance Bill, 2022, treat investments in cryptos similar to other assets like mutual funds, shares, land, etc.?
No. Think of crypto investments as a separate island which has nothing to do with the rest of your portfolio.
The language in the provision is "any income from transfer of a VDA" will attract 30% tax. It doesn’t say gains from VDA.
Mutual funds, land, shares are all capital assets, gains from which get categorised as long term or short terms, and taxed accordingly depending on the holding period etc.
No such concepts apply to VDAs.
That’s because the government did not want to get into the framework of capital gains tax, points out Vivek Gupta, partner at KPMG India. So, concepts like calculation of capital gains after accounting for expenses, deductions, indexation, forex fluctuation etc will not apply to VDAs, he says.
Does the 30% tax mean crypto assets have been legalised in India?
A tax law can’t make anything legal or illegal—that has to be done via a separate statute, said Ajay Rotti, partner at Dhruva Advisors. A provision in the income tax law that says betting and gambling is taxable at 30%—can one read this to mean that IPL betting is legal? It’s an emphatic no, he said.
The stakeholders want to read the tax provision as legalising cryptos, and that because this tax provision has come in, the government won’t ban it. But that’s not the correct reading, Rotti says.
The government can tomorrow say the only cryptos that are allowed are those issued by the central banks and sovereigns. And that I will not recognise private cryptos. Even the definition of VDAs allows the government to make inclusions and exclusions.Ajay Rotti, Partner, Dhruva Advisors
Similar to how all betting and gambling is banned but horse racing is allowed, the government can still ban specific crypto assets, Rotti said.
What will this 30% tax be applicable to?
Your income from crypto assets—sale, transfer, barter for services, exchange included—minus the cost of acquisition.
So, assume your purchased bitcoin is worth Rs 1 lakh. And sold it for Rs 1,50,000. The 30% will be applicable on Rs 50,000.
That’s the simplest way of looking at it. But things become complicated when you start looking at the ingredients of cost of acquisition. Specifically, whether it will include direct expenses such as brokerage charges, gas fees, exchange fees etc?
It’s not clear if these incidental expenses will be covered in "cost of acquisition", Badri Narayanan, executive partner at Lakshmikumaran & Sridharan, said.
My view is that the revenue department will take a view that cost of acquisition will be limited only to the value of the virtual asset and nothing else.Badri Narayanan, Executive Partner, Lakshmikumaran & Sridharan
The obvious consequence of this approach will be a higher amount being available to tax.
Will the benefit of set-off be available?
Short answer:
Inter-asset—no. Meaning, for instance, loss in bitcoin cannot be set-off against gains from mutual funds or vice versa.
Intra asset—for instance, can loss from bitcoin be set-off against profit from NFT? Experts are divided on this.
The treatment of set-off becomes important to calculate income on which 30% will be applicable.
Let’s say, an investor has two bitcoins—one sold for a profit, one sold for a loss. Badri opined that his preliminary view is that intra asset set off benefit will be available to investors.
Under the tax law, income is calculated on an annual basis. It’s not like GST where you’re looking at transaction by transaction taxation. So, you compute income after accounting for loss and profit for the entire year. It’s possible that you’ve made loss for 364 days in a year and a profit on 1 day or vice versa.Badri Narayanan, Executive Partner, Lakshmikumaran & Sridharan
Rotti holds a more conservative view.
"If you gain from bitcoin but loss from NFT, my reading is that the set off still won’t be allowed. The provisions, read together, seem to suggest that even within virtual digital assets, no set-off is allowed. So you forget the loss, and pay 30% on profit."
Gupta concurs, saying his initial view is perhaps the intent is you capture all the gains at one level, subject them to tax and the losses just vanish. ‘In the main charging section, the words used are no expenditure, no allowance, no set-off except cost of acquisition’.
Are you better off selling existing investments before April 1, 2022?
Depends on an individual’s confidence in this asset but purely from a tax point of view, investors might be better placed to exit before April 1, 2022 for existing investments.
That’s because, according to Rotti, investors might be able to argue that until Mar 31, 2022, crypto is a capital asset. And all the benefits of capital gains should be available.
If an investor has been holding let’s say, bitcoin, since 2018, it’s more than two years. It can be argued that the profits should be treated as LTCG gains and taxed at 20%. If you’re sitting on a loss, investors might want to consider booking that loss since it can be set off against profit. If you do this after April 1, it’ll become crypto loss and no set off benefit will be available.Ajay Rotti, Partner, Dhruva Advisors
Badri agrees - definitely, for gains made prior to April 1, 2022, there could be benefits available. 'Now what the government has imposed is the highest rate. Any other treatment will give you a lower number,'
When will the recipient need to pay tax if a crypto asset is gifted?
When you receive it and not when you sell it, Gupta said. Gift will be taxable as soon as the asset come into your ownership even though you may not have realised the money value of it.
How will the government keep a track of all transactions? What if a swap is done between Bitcoin/other coins and stable coins?
Tax is the first step. The government is likely to strengthen its enforcement ability through a specific statute for crypto assets, Badri says. The government may say that investments can be done only through specific recognised exchanges. They may ask exchanges to share more information. Also, when money starts hitting your bank account or recognised wallets, that will help with enforcement, he explains.
The TDS provision will help with all of this for. So far, not all platforms, exchanges ask for investors' permanent account number, especially overseas ones. Now the 1% that needs to be deducted by the payer will have to be against the PAN of the crypto seller.