In its Union Budget for the fiscal year 2022-2023, India has proposed and introduced the notion of classifying cryptocurrencies as virtual digital assets (VDAs). However, despite the classification of cryptocurrencies as assets, common national assets’ taxation rules do not apply.
India has implemented a 30% income tax for VDAs. The policy is effective from April 1st, 2022, however, transactions involving cryptocurrency from the previous fiscal year 2021-2022 are also subject to the 30% income tax. This article shall provide summary points from the introduction of such policy.
Income tax at 30% on profits arising from sale of cryptocurrency
Investors purchasing crypto assets and subsequently selling them at a profit and realizing the gain, will have such gain taxed at the rate of 30% in India. This tax rate is viewed as significant, especially compared to capital gains tax derived from equity investments’ profit, which is set at 10%-15%. The introduction of the 30% tax bracket is likely to have a significant impact on smaller individual investors and players in the industry.
VDAs losses cannot be used to offset gains on other VDAs and assets
Set-off loss arising from one VDA cannot be used to reduce taxable gain from another VDA. For example, an investor incurring a capital loss from the sale of Ethereum cannot use it to offset gain realized from the sale of Bitcoin. A 30% tax on the gains from Bitcoin shall be paid.
Carrying forward of losses not permitted
Furthermore, on top of the fact that VDAs losses cannot be used to offset gains on other VDAs, the law does not allow cryptocurrency investors to carry forward losses from one fiscal year to another to offset future gains made on the same cryptocurrency.
TDS of 1% applies on transfers of cryptocurrency
Starting from July 1st, 2022, every cryptocurrency transaction will be subject to a 1% tax deducted at source (TDS). This 1% TDS applies to the entire transaction value for VDAs. This will likely result in less activity regarding capital being driven in and out of the cryptocurrency markets, worsened liquidity, as well as activities of day trading and margin trading reduced. The provisions of this 1% TDS are still vague, especially considering that it can be problematic to determine what constitutes a transfer of cryptocurrency, given the underlying technology and besides simple buying and selling at the centralized exchanges, other variations exist, such as wallet transfer, P2P lending, staking, among others.
Cryptocurrencies which are acquired as either gifts or through an inheritance procedure shall be taxed at 30% without reference to the income bracket level of the recipient.
It is important to notice that taxing VDAs does not legitimize them according to the Union Finance Minister as the VDA market in India remains unregulated.
Furthermore, it has been noted by market practitioners that the introduction of such aggressive tax measures will curb investment in the sector and may result in shifting Indian industry participants into other jurisdictions which have favorable tax regimes for cryptocurrencies. One of the main destinations being the UAE, which has become a global cryptocurrency hub in the past decade.
At PHC Advisory, we can offer your business in India all the necessary support related to bookkeeping, treasury, tax compliance, and other related solutions to navigate and fully comply with the complex Indian regulations. We constantly monitor the regulatory and fiscal updates in the Indian market and if you would like to know more about the most recent tax developments, please contact us at email@example.com.