Sakshi Shah
cryptocurrency
Non-Fungible Token
Tax on Cryptocurrency
Tax on NFT
Tax on VDA
Virtual Digital Asset
Last updated on February 8th, 2023
Under Budget 2022, the Finance Minister, Nirmala Sitharaman introduced a new Section 115BBH for tax on cryptocurrency and other VDA (Virtual Digital Assets) at a flat rate of 30%. Section 115BBH includes provisions for taxing income on VDA transfer, gifting, claiming of expenses, and treatment of loss. This section would be effective from 1st April 2022. Further, adding to the crypto news, the finance minister also introduced a new Section 194S for the deduction of TDS on the transfer of virtual digital assets.
INDEX
- Income Tax on Cryptocurrency and VDA under Section 115BBH of Income Tax Act
- Income Head for Crypto Tax
- Calculation of Capital Gain Tax on Cryptocurrency Transfer
- Tax on Cryptocurrency – Treatment of Loss from transfer
- TDS on transfer of cryptocurrency and other VDA
- Income Tax Notice for Crypto Traders
- GST on Cryptocurrency, NFT, VDA
- FAQs
Income Tax on Cryptocurrency and VDA under Section 115BBH of Income Tax Act
Section 115BBH of the Income Tax Act would be effective from 1st April 2022, to tax the income from virtual digital assets. Here are the crypto tax provisions.
- What is a Virtual Digital Asset (VDA)?
As per Section 2(47)(A) of the Income Tax Act, a Virtual Digital Asset (VDA) includes cryptocurrency, Non-Fungible Tokens (NFTs), and any other digital asset notified by the central government in the official gazette. - Section 115BBH of the Income Tax Act
If a taxpayer has income from the transfer of VDA, they must pay income tax at flat rate of 30%. - Deductions on transfer of VDA
- The taxpayer cannot claim any expense or allowance against such income.
- The taxpayer can claim the cost of acquisition i.e. purchase price as a deduction from the income.
Thus, Taxable Income = Selling Price – Purchase Price. - Taxpayer cannot set off the loss from the transfer of VDA against any other income. Further, he/she cannot carry forward the loss to future years.
- Gift of Crypto Investment
A gift of cryptocurrency, NFT, or other VDA is taxable in the hands of the receiver.
Income Head for Crypto Tax
The Budget 2022 announcement did not have much clarity regarding the correct income head to classify the income from the transfer of VDA.
Transfer of Crypto as Income from Capital Gains
Income from the transfer of Virtual Digital Asset (VDA) should be classified under Capital Gains for the following reasons:
- As per Section 2(14) of the Income Tax Act, the definition of Capital Asset includes ‘any other capital asset’. Cryptocurrency and other VDAs can be treated as other capital assets.
- The term ‘transfer of asset’ as per Section 115BBH usually refers to capital assets.
- The term ‘cost of acquisition’ as per Section 115BBH is usually used to calculate income from capital gains.
Transfer of Crypto as Income from Other Sources (IFOS)
Income from the transfer of Virtual Digital Asset (VDA) should be classified under IFOS for the following reasons:
- Section 115BBH is in line with Section 115BB for tax on winning lottery, betting and gambling which is taxed under the head IFOS
- As per Section 2(14) of the Income Tax Act, the definition of Capital Asset does not specifically include Cryptocurrency and other VDAs.
However, the Income Tax Department has started sending out tax notices to taxpayers who traded in crypto in previous years but did not report such income in the ITR. Although there is not much clarity regarding the income head under which the taxpayer should report such income, the notice seems to consider it under the head Capital Gains. The Income Tax Department must clarify this by means of a circular.
Calculation of Capital Gain Tax on Cryptocurrency Transfer
To calculate capital gain on transfer of Virtual Digital Asset, consider the following:
- Capital Gain = Full Value of Consideration (Selling Price) – Cost of Acquisition (Purchase Price)
- Taxpayer cannot claim transfer expenses i.e. expenses incurred on transfer
- Taxpayer cannot claim the Cost of Improvement as an expense
- Indexation benefit is not available
- Taxpayer cannot claim a capital gain exemption under Section 54 to 54F
- Taxpayer cannot claim deduction under chapter VI-A on such income
Particulars | Amount | |
Full Value of Consideration | XXXX | |
Less | Cost of Acquisition | (XXXX) |
LTCG / STCG | XXXX |
Tax on Cryptocurrency – Treatment of Loss from transfer
Following are the restrictions on the treatment of set off and carry forward of losses on the transfer of cryptocurrency, NFTs, and other VDAs:
- Taxpayer cannot set off the loss from the transfer of one VDA against profit from the transfer of another VDA
- Taxpayer cannot set off the loss from the transfer of VDA against any other income
- The taxpayer cannot carry forward the loss on the transfer of VDA to future years
- The taxpayer cannot set off a loss under any other head of income against profit on the transfer of VDA
TDS on transfer of cryptocurrency and other VDA
Along with the provision of cryptocurrency taxes at 30%, the government also introduced Section 194S for the deduction of TDS on the transfer of cryptocurrency and other VDAs. As per Section 194S, the person responsible for making the payment on the transfer of a VDA must deduct TDS at the rate of 1% if the aggregate transfer amount during the financial year exceeds INR 10,000. The said limit is INR 50,000 in the case of specified persons.
Income Tax Notice for Crypto Traders
The Income Tax Department had sent out notices to multiple taxpayers for not reporting the crypto trading in the ITRs of the previous years. When a trader signs up on a crypto exchange, he must complete the e-KYC process. Using the data of PAN, Aadhaar or linked bank accounts from the compliances done by the crypto exchanges, the income tax department has the data of all your crypto trades.
The ITD sent out tax notices for crypto trading to taxpayers under Section 148A of the Income Tax Act. This notice was to conduct an inquiry to provide an opportunity before issuing notice for escapement of income under Section 148. The notice mentions the amount of crypto trading in a financial year and if the taxpayer did not report it as Capital Gains in the ITR of the relevant year. It provides the taxpayer an opportunity to provide an explanation by responding through emails.
The taxpayer must respond to the notice within the stipulated time. You can submit a response to the email as mentioned in the notice. You can also submit an online response under e-proceedings from your account on the income tax website with the justification and relevant proofs.
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GST on Cryptocurrency, NFT, VDA
While Budget 2022 introduced the provision for income tax applicability on cryptocurrency, NFT, and VDA. However, there is no clarification yet for the applicability of GST on cryptocurrency, NFT, and VDA. Based on our interpretation of the GST Act, a virtual digital asset falls under the definition of goods. Thus, the sale of crypto and other digital assets is taxable under GST. Further, the services provided by crypto exchanges are also taxable under GST. However, a clarification is awaited from the GST Council on the applicability of GST on cryptocurrency and other digital assets.
FAQs
How is crypto trading taxed in India?
Income from the transfer of cryptocurrency, NFT, and other virtual digital assets is taxed at a flat rate of 30%. Further, the person responsible for making the payment on the transfer of cryptocurrency must deduct TDS at a rate of 1% under Section 194S.
What is the income head for reporting trading in cryptocurrency in India?
Cryptocurrency can be classified as any other capital asset as per Section 2(14) of the Income Tax Act. Thus, income from trading in cryptocurrency should be reported under the head ‘Capital Gains’ in the Income Tax Return. Further, the taxpayer cannot claim any expenses or allowances except the cost of acquisition against income from the transfer of cryptocurrency.
Can I set off loss from crypto trading against other incomes?
As per Section 115BBH of the Income Tax Act, here is the treatment of loss from transfer of cryptocurrency:
* Loss from transfer of cryptocurrency cannot be set off loss against any other income. It cannot be carried forward to future years.
* Loss under any other head of income cannot be set off against profit on transfer of cryptocurrency
How to calculate taxes on cryptocurrency trading?
Section 115BBH of the Income Tax Act lays down provisions for tax on cryptocurrency.
* Income on transfer of cryptocurrency is treated as Capital Gains and taxed at flat rate of 30%
* Capital Gains = Full Value of Consideration (Selling Price) – Cost of Acquisition (Purchase Price)
Hey @Rakesh_Sharma
There is ambiguity on how to tax cryptocurrency since the Govt doesn’t consider Cryptocurrency as a legal tender. There are 2 schools of thought that discuss can be taxed under Income from Other Sources or Capital gains.
To understand more about the taxability of Bitcoin, please refer to this article.
Hey,
If I buy crypto and sell within the same year, what kind tax will be applicable at what rate or is there no tax?
@Latesh_Bayad, there are two schools of thought for taxes on crypto, some believe it should be taxed as capital gains and others believe it should be considered as income from other sources.
If the cryptocurrency is held as an Investment and being exchanged for Fiat Money it may be treated as capital gains.
There are some articles which you might find usefulHey @Shama,
The taxability of Cryptocurrencies arises under Income from Capital Gains if it is held as investment or trading. The cryptocurrency shall be considered as a Capital Asset and the taxability shall arise in the hands of person owning the same.
In Your case, since, Person A is owner of the cryptocurrencies; so any gains arising from sale of cryptocurrencies shall be taxable in the hands of Person A as the data/KYC registered with exchange is that of Person A. It shall make no difference if the proceeds are received in Joint Savings A/c which is held along with Person B.
Person B shall ignore the same proceeds in his ITR as Person A is paying the taxes in his ITR.Hope it helps!
Budget 2022 brings taxes on Crypto, NFTs and other Virtual Digital Assets
Hi @Murali_Krishnan_S, if you are receiving profits in India then you will be taxed at 30% + 4% HEC and if you are receiving profits outside of India, then they are not taxable in India. You can also go through the blog attached below which will help you how the new budget affects you crypto trading and profits. Let me know if you need any further clarification.
Irrespective of my tax slab ; crypto is taxed @30% . ?
I mean if my income is zero and i made profit from crypto trading Rs. 1 lakh ; i pay tax 30,000/= ? Or i’ll get STGC excemption of 1 lakh ?
Or crypto is taxed 30% based on my tax slab ?
In this case ; if my income is 5 lakhs including 1 lakh income from crypto trading ; i declare crypto income in first slab which is taxfree upto 2.50 lakh !
What is the rule ?
Hi @HIREiN,
Unlike incomes such as salary, house property, capital gains from equity shares, mutual funds, ETFs etc. the basic exemption limit rule does not apply to income from Crypto, NFTs, and other virtual digital assets.
Meaning, that even if your total income is below the basic exemption limit you will have to pay tax on your earnings from crypto.Hi @samben
You can reply to the notice from the Income tax department with help of our tax experts by booking a MEET.
You need not disclose the crypto holding in your ITR. Only when you have sold and hence have gains/loss you are required to disclose the same.
As someone deeply entrenched in the world of cryptocurrency taxation, let me delve into the intricacies of the concepts mentioned in the article you provided.
1. Virtual Digital Asset (VDA): In the context of taxation, a VDA encompasses a broad range of digital assets, including cryptocurrencies like Bitcoin and Ethereum, as well as Non-Fungible Tokens (NFTs). This definition is outlined in Section 2(47)(A) of the Income Tax Act.
2. Section 115BBH of the Income Tax Act: This section, effective from April 1, 2022, imposes a flat income tax rate of 30% on the transfer of Virtual Digital Assets (VDAs). It covers various aspects such as taxation on income, deductions, and treatment of losses related to VDAs.
3. Income Head for Crypto Tax: The classification of income from cryptocurrency transactions under the appropriate head for taxation purposes has been a topic of debate. While some argue for categorizing it under Capital Gains, others advocate for treating it as Income from Other Sources (IFOS). The determination depends on factors such as the definition of capital assets and the nature of the transactions.
4. Calculation of Capital Gain Tax: Capital gains arising from the transfer of VDAs are computed by subtracting the cost of acquisition from the selling price. However, certain deductions and exemptions available under other provisions of the Income Tax Act may not apply to VDA transactions.
5. Treatment of Loss from Transfer: Restrictions exist on offsetting losses from VDA transfers against other income or carrying them forward to subsequent years. This limits taxpayers' ability to mitigate losses incurred in VDA transactions.
6. TDS on Transfer: Section 194S mandates the deduction of Tax Deducted at Source (TDS) at a rate of 1% on the transfer of VDAs, provided the aggregate transfer amount exceeds specified thresholds during the financial year.
7. Income Tax Notice for Crypto Traders: The Income Tax Department has been actively monitoring cryptocurrency transactions and issuing notices to taxpayers who may have failed to report such income in their tax returns. These notices serve as a means for the department to inquire about potential discrepancies and provide taxpayers with an opportunity to respond.
8. GST on Cryptocurrency, NFT, VDA: While income tax provisions have been introduced for cryptocurrencies and other digital assets, clarity is still awaited regarding the applicability of Goods and Services Tax (GST) on these transactions. Depending on interpretations, the sale of VDAs and related services provided by crypto exchanges could potentially fall under GST taxation.
By dissecting these concepts, we gain a comprehensive understanding of the tax landscape surrounding cryptocurrencies and other virtual digital assets in India. If you have any further questions or need clarification on specific aspects, feel free to ask!