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Crypto Taxation in India: Section 115BBH and What it Means for Investors

When Finance Minister, Nirmala Sitharaman, announced in the Union Budget 2022 how taxation of crypto assets would be treated, many in the industry were elated. This progressive step toward legitimising crypto as an asset class in India was seen as a huge milestone that paved the way toward positive regulation. However, this was a bittersweet moment for many once they understood the implications of these tax laws. 

Here’s a breakdown of Section 115BBH which outlines the new crypto taxes in India for ‘virtual digital assets’ that will come into play from April 1st, 2022.

  • Virtual digital assets refer to both crypto assets, such as bitcoin or ethereum, and NFTs. 
  • Income generated from the transfer of such virtual digital assets will be taxed at 30%.
  • 1% TDS will be deducted on such transfers.
  • No deduction will be allowed for expenditures (aside from the cost of acquisition) related to purchasing such assets.
  • Infrastructure costs for mining virtual digital assets cannot be considered as part of the cost of acquisition and hence cannot be set off against earnings.
  • No set-off or carry-forward of losses arising from transactions. 
  • Losses from one virtual digital asset cannot be set off against income from a different virtual digital asset.

What is the impact of the proposed 30% tax rate on crypto investments?

Firstly, when compared to the maximum tax rate of 20% for similar transactions in equity markets, the 30% tax rate is extremely high. Many experts compare this to the 30% taxation applicable on winnings from gambling, lotteries, and game shows, indicating that the government seems to be actively trying to dissuade investments in this category. 

When is the 1% TDS on crypto applicable?

The 1%TDS is applicable on the sale consideration of every trade post July 1st, 2022. The buyer will need to deduct this amount from the amount due to the seller. In essence, this would mean that investors would lose 1% of their capital on every trade. While any TDS amount above taxes due would ultimately be refunded, it would have a crippling effect on the capital for day traders and short-term investors. This would mean that from a macroeconomic perspective, the amount of capital invested in crypto would constantly reduce with each trade, in effect, reducing overall profits of the category.

No deduction will be allowed for crypto investors, apart from the cost of acquisition of the asset.

This means that any ancillary expenses, such as consultation with professionals or fees paid to intermediaries such as exchanges, cannot be deducted from income generated through the sale of crypto assets. This would make traders wary of investing in products or services that would enable them to invest more effectively. Owing to the complexity of the category, this has the potential to hinder the success prospects of new investors. Moreover, those who invest in hardware for the purpose of mining cannot deduct these costs from gains made when they sell the crypto they mine.

No set-off or carry-forward of losses on crypto.

Unlike trading in equity, where losses from investments in any stock can be set off against profits from other stocks, there will be no set-off option for crypto asset investments. Let’s understand this through an example: Raj buys bitcoin for Rs. 50,000. The value of the bitcoin he bought then drops to Rs. 45,000 and he decides to sell it and invest the proceeds in an equivalent amount of ethereum. The value of his ether, which he bought at Rs. 45,000, moves to Rs. 60,000 and he decides to sell it. In this case, Raj has made a net profit of Rs. 10,000 (Rs. 15,000 profit on ether minus Rs. 5,000 loss on bitcoin). However, he will have to pay 30% tax on Rs. 15,000 as his Rs. 5,000 loss on bitcoin cannot be set off against his Rs. 15,000 profit on ether. 

How does this impact investors?

While India’s recently announced crypto taxation laws are a step forward, certain aspects need to be reconsidered for the greater good of both the nation and those that participate in this industry. 

Firstly, crypto taxation should be treated at par with the taxation of gains in equity markets. Crypto is driving revolutionary change across the world, and it is in our nation’s interests to encourage, not dissuade participation. Secondly, Indian exchanges ensure all investors are KYC verified which discourages illegitimate transactions. Taxation barriers will act as a deterrent to use of Indian exchanges and many will turn to external global exchanges for anonymity, allowing them to avoid taxation entirely. Thirdly, crypto and blockchain have given rise to unparalleled innovation across sectors: from finance to education to healthcare and beyond. Restrictive tax laws will serve as a barrier to adoption and innovation, allowing other nations to take the lead in this critical sector. 

Crypto is the future of global financial markets and blockchain is a hotbed of innovation. We are wholly committed to India and the Indian crypto community, and we respectfully hope our lawmakers take progressive steps to nurture, and not hurt, this burgeoning industry. 

FAQs

Answer: The 30% tax is effective from April 01,2022, Profits realized from the sale of crypto assets will be taxed at 30%.

Answer: You need to pay a 30% Income Tax at the time of annual Income Tax filing. FYI, you might want to consult with a financial advisor to assist with your Tax filing.

Answer: Starting 1 July 2022,tax deduction at source (TDS) at 1 per cent will be deducted on all types of Crypto transfers. the buyer will need to deduct this amount from the amount due to the seller. In essence, this would mean that investors would lose 1% of their capital on every trade.

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