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.
- 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
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
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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.
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.
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)