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There's a new Crypto tax in town

Updated: May 30

You've all seen the news - there's a new tax introduced on cryptocurrencies in Budget 2021. How does this affect you? Is this good news or bad news?


Let's get into it.


Here's what's covered:

  1. Virtual Digital Asset

  2. Tax on Transfer of Virtual Digital Asset

  3. Set-off of loss

  4. Carry forward of loss

  5. TDS

  6. Examples

  7. Tax on Transfer

  8. How does TDS work?

  9. Set-off of loss

  10. Carry forward of loss

  11. Ambiguities

  12. Good news or bad news?


Virtual Digital Asset


Virtual digital assets have an official definition now. Broadly, here’s what it includes:

  • All cryptocurrencies (whether on private or public blockchain)

  • All NFTs

  • Any other digital asset that the Government may notify

Tax on Transfer


There is a flat tax of 30% (plus surcharge and cess) on transfer of a virtual digital asset.

The transfer is treated as income from capital gains. No other expenses are allowed. Only cost of acquisition is allowed as a deduction.


What does this mean? A lot of people were thinking of including trading/ investing in crypto or NFTs as business income and taking expenses against this (read - Salary to family, rent, depreciation, etc). The Government has essentially said "nope - if you want to trade in crypto, we want a blind 30% of your gains".


Set-off of Loss

The income tax department has clarified that loss from crypto cannot be set-off against gain from another crypto.


This means that if you made a loss from sale of Etherium and a profit from Bitcoin, you can set-off the gain against the loss. Tax will be payable on the gain from Bitcoin.


Carry forward of Loss


You cannot carry forward any losses from virtual digital assets.


TDS


TDS at 1% will be deducted from your sale value.


Note: This is not an additional tax. The tax is not 30% + 1%. TDS can be set-off against your actual tax liability.

There's a few nuances to the TDS rules that still need to be clarified. While centralized exchanges will start deducting TDS (that should be fairly straight forward), question is how do you deal with decentralized exchanges as well as P2P transfers.


TDS is required to be deducted when:

Consideration is payable by

  • Individual/ HUF whose turnover for previous year was less than INR 1 crore (business) or INR 50 lakh (profession): AND Sale value/ Consideration paid to a person in a financial year exceeds INR 50,000

  • Individual/ HUF who doesn't have income from business or profession: AND Sale value/ Consideration paid to a person in a financial year exceeds INR 50,000

  • Any other person/ entity: AND Sale value/ Consideration paid to a person in a financial year exceeds INR 10,000


What does this mean? Centralized exchanges like WazirX, Vauld, CoinDCX will deduct TDS at 1% if crypto sold is more than INR 10,000.


If you are in the Web 3.0 world, and make payments in crypto currency, you may have to start deducting TDS.


Examples

Let's break this all down with a few examples. That should make things easy to understand.


a. Tax on Transfer


Nikhil has invested INR 1 lakh in Bitcoin 5 years ago. This is worth INR 40 lakh now. He decides to sell all his Bitcoin. How is tax calculated?


Tax for Nikhil will be calculated as under:






(plus applicable surcharge and cess).


Nikhil cannot claim any expenses against this sale of crypto.


What if Nikhil had mined this crypto though? Does he get to consider the cost of his mining setup? More on this in the ambiguities section.


b. How does TDS work?

Let's continue with the Nikhil example:

Nikhil has invested INR 1 lakh in Bitcoin 5 years ago. This is worth INR 40 lakh now. He decides to sell all his Bitcoin. He has his account on WazirX which deducts appropriate TDS at 1%.


Tax for Nikhil will be calculated as under:








(plus applicable surcharge and cess).


Notice that the TDS is 1% of sale value (INR 40 lakh). The TDS is set-off against the tax liability. It is not an additional tax.


c. Set-off of loss


Let's assume Mr. Smartass has the following capital gains in a year:






Mr. Smartass thinks since has made an overall loss, he need not pay any tax this year. Let's see how it works out though.


Tax for Mr. Smartass will be calculated as under:








(plus applicable surcharge and cess).


Loss from sale of Virtual digital asset cannot be set-off against any other gains.


d. Carry forward of loss

In the above example, Mr. Smartass thought that he'll just set-off his loss against crypto gains from next year. He's in for a rude awakening though.


The INR 15,00,000 of loss for Mr. Smartass will be lost forever. This loss cannot be carried forward.


So if you want to be a smartass and ensure you plan your taxes correctly, you now know what to do :)


Or.. you can just contact us and our team of experts will be happy to help.


Ambiguities


While the new crypto regulations do bring in some regulatory clarity, there are quite a few issues still left open to interpretation:

  • Crypto mining If only cost of acquisition is allowed, how do crypto miners deal with their taxes? What about their costs associated with running mining rigs?

  • Crypto swaps Everyone in the Web 3.0/ Crypto world knows that there are millions of crypto pairs. How do you deal with tax on these? Our view is that each crypto swap is a taxable event and you have to pay taxes on the fair market value (INR value) of the same each time you do a swap.

  • Overseas exchanges While we expect the WazirX, CoinDCX and Zebpays of the world to comply with Indian regulations, what about overseas exchanges like Binance, Coinbase, etc? How do you deal with tax on transactions on these exchanges?

  • Decentralized exchanges What if you have transactions on Pancakeswap or Uniswap? What if you transfer funds between your Metamask Wallet and Trust Wallet? The current regulations are extremely ambiguous in dealing with these matters.

  • Airdrops How do you handle Airdrops? Do these count as income from other sources? Should they also be taxed at the flat 30% even if you don't sell?

  • Staking/ Yield farming/ Liquidity providing How do you handle staking/ farming or other yield generating activities? Should these also be taxed at the flat rate of 30%? A bigger issue seems to be that these would involve transfer to another wallet - which appears to be a taxable event. Even if you transfer for staking or lending, the ownership of the transferred wallet is not yours, so it's a taxable transfer.

  • What if you get paid in crypto?

While there appears to be no clear cut answer for these questions, we have been operating a crypto compliance model to handle such matters specifically. Feel free to reach out!


Good news or Bad news?

Overall, this does seem to bring some regulation to the crypto world. While hardcore believers in crypto concepts such as decentralization might balk at the regulations, a lot of people are glad they live in a world where the Government finally recognizes crypto.


That being said, the Government has been very clever in not using the word crypto at all and defining Virtual Digital assets.

Does this mean crypto is legal?

Unfortunately, no. But it's not illegal - and that's always a plus. We'll have to wait for the crypto regulation bill before we know the actual stance of the Government. For now, it does seem like the Government is on the path to recognizing crypto.


However, it's almost certain that the Government is going to treat Crypto as an asset and does not want you to be accepting money in crypto terms as legal tender.



Need help with figuring out your crypto taxes? Feel free to contact us! Our team of experts is always happy to help.

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