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 transfer of VDA, gifting of VDA, 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.
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.
The Budget 2022 announcement did not have much clarity regarding the correct income head to classify the income from the transfer of VDA.
Income from the transfer of Virtual Digital Asset (VDA) should be classified under Capital Gains for the following reasons:
Income from the transfer of Virtual Digital Asset (VDA) should be classified under IFOS for the following reasons:
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.
To calculate capital gain on transfer of Virtual Digital Asset, consider the following:
|Full Value of Consideration||XXXX|
|Less||Cost of Acquisition||(XXXX)|
|LTCG / STCG||XXXX|
Following are the restrictions on the treatment of set off and carry forward of losses on the transfer of cryptocurrency, NFTs, and other VDAs:
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.
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 Income Tax Department sent out notices 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 Income Tax Return 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.
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.
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.
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
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)