Earlier this month, the Indian Government imposed a 30% crypto tax on the profits earned through virtual digital assets. Also, 1% of TDS will be applicable on transfers of these assets along with cryptocurrencies. The Indian Government plans to introduce a new clause (47A) that will define the term “virtual digital asset” as per the law. The tax is imposed on the profit gained that is calculated after deducting the “cost of acquisition”. The cost of acquisition includes the purchase price of the crypto and the gas transaction fees.
According to the law, a virtual digital asset is one that includes any information or number or code or token developed through cryptographic means or otherwise. Non-fungible Tokens (NFTs) also come under this category. The term includes the following types of crypto assets/ currencies such as:
- Ready money, for example, Bitcoin (BTC)
- Open Blockchain Tokens, for example, Wrapped Asset Token (WRAP)
- Hush/ privacy coins, for example, Monero (XMR)
- Application coins, for example, Filecoin (FIL)
- Security tokens, for example, Exodus
- Non-Fungible Tokens (NFTs), for example, Crypto Kitties
- Algorithmic stablecoins, for example, Frax (FRAX)
- Governance tokens, for example, Uniswap (UNI)
- Public Blockchain natives, for example, Ether (ETH)
- Asset-backed tokens, for example, Tether (USDT)
- Lending / Borrowing cryptos, for example, Aave (AAVE)
Tax experts say that there should be more clarity on the definition of digital virtual assets because the present definition has some loopholes.
Benefits of Crypto Taxes
- Imposing a tax on crypto profits brings more clarity to the regulation of cryptocurrencies in the country.
- Indian finance minister Nirmala Sitharaman announced the launch of Central Bank Digital Currency (CDBC) in 2022-23 to enhance the country’s economic growth.
- Tax deduction at source (TDS) of 1% on crypto transactions will help in tracking the crypto investments in the country.
- Money received as gifts from relatives, in marriage, or under will/inheritance is not taxable.
- If money gifted in a financial year is less than Rs. 50,000, then it is non-taxable.
- Crypto HODLers who buy crypto and hold it without selling, need not pay taxes even if the crypto prices go high.
- Crypto miners should also pay a 30% tax on profits earned while their cost of acquisition will be deducted. The cost of acquisition includes electricity costs, depreciation on mining computers, etc.
Detriments of Crypto Taxes
- Crypto investors cannot proclaim any loss or hack of cryptocurrencies to make up for taxation on profits.
- Money received as gifts from friends is taxable and money received on birthday/anniversary is taxable.
- Crypto staking and lending is also taxed when the digital currency is sold.
- Crypto salary is also subject to 30% tax.
The Impact on Crypto Exchanges
From July 1, 2022, cryptocurrency exchanges will deduct 1 percent TDS under the new section 194S of the Income Tax Act. This deduction ensures that all the crypto transactions are reported to the government. There is a category of people for whom the TDS will be applicable only if their total amount of crypto transactions cross Rs. 50,000 in a year. The category of people is as follows:
- Individuals that have total business sales/ gross receipts/ turnover exceeding Rs. 1 crore a year.
- Individual professionals whose yearly income is more than Rs. 50 lakh.
- Individuals who have no income from business or any profession.
- Others whose total amount of crypto transactions exceeds Rs. 10,000 in a year will be subject to TDS.
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Decentralized exchanges like Uniswap and Foreign exchanges like Binance will not deduct any TDS, but the investor or trader will have to pay the necessary taxes. Peer-to-peer marketplaces like LocalBitcoins will require the user to pay taxes. If the necessary taxes are not paid, then the investor or trader will be subject to tax evasion and will have to pay heavy penalties when caught.