We have seen a multifold rise in digital currency investors since 2020. A tax regime for digital currency was expected in the Budget 2022 due to prevailing ambiguity. On the one hand, there was a law to pay tax on such income, and on the other hand, the government had sent notices to the investors who skipped reporting and paying taxes on crypto income last year. This led to confusion amongst taxpayers regarding how they go about paying taxes on income from such digital assets.
The Finance Bill, 2022, introduced a 30% tax rate on income earned from the transfer of virtual digital assets such as cryptocurrency. New Sections 115BBH and 115BBI have been introduced in Finance Bill, 2022 for this matter.
Finance Bill, 2022 defines ‘virtual digital asset’ as—any number, token, code, etc., generated through cryptographic means or any other mode, functioning as a store of value, which can be transferred and stored electronically. It includes non-fungible tokens (NFTs) or any other digital asset as notified by the Central Government. The new law shall be applicable with effect from 1st April 2023.
According to the bill, no deduction except the acquisition cost will be allowed for any expenditure incurred from digital currency income. Further, the loss incurred on such virtual digital assets cannot be set-off from any other income. This means that any loss from the virtual digital asset can be set-off from income from virtual digital assets only. For instance, if you have incurred Rs.1.5 lakh loss from a Bitcoin transaction and earned Rs. 1 lakh profit from an Ethereum transaction, you can offset this loss from such income. However, the additional loss of Rs.50,000 cannot be set-off with any other source of income.
Additionally, to keep track of the transactions, TDS (tax deducted at source) under Section 194S will become applicable at the rate of 1% above a threshold. This means TDS @ 1% is to be deducted by the buyer of the digital asset when making payment to the seller. However, TDS will not be required to be deducted if the buyer:
- Is a specified person, and the cumulative value of purchase does not exceed Rs.50,000 in the financial year
- Is not a specified person, and the cumulative value of purchase does not exceed Rs.10,000 in the financial year
Here, a specified person means an individual or a Hindu Undivided Family (HUF) whose total turnover from the business does not exceed Rs. 1 crore rupees or Rs. 50 Lakhs rupees in case of the profession, during the preceding financial year.
Additionally, income tax will be levied even if the digital currencies are transferred as gifts. Income Tax Acts provision of ‘gift taxation’ will become applicable in such scenarios. Accordingly, any gifts in the form of a virtual digital asset above Rs.50,000 will be entirely taxable in the hands of the recipient except if such a gift is received from any relative defined in the act. The definition of relative include spouse, brother, sister, and any lineal ascendent or descendent of the individual or spouse.
It seems that the government wants to treat the income from virtual digital assets akin to speculative income, and hence, similar tax provisions have been introduced. However, stakeholders have confusion regarding when and how the TDS will become applicable, under which head the income is to be reported, whether carry forward provisions will be applicable or not, etc. More clarity is required in this regard.
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