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  • Galactic Advisors

There's a new Crypto tax in town

Updated: May 30, 2022

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: