Know when the income tax exemption applies for gifts received as crypto assets

In Budget 2022, the government has proposed that the gifts received as cryptocurrency, Non-Fungible Tokens (NFTs), etc. or the transfer of such assets without consideration shall be taxable in the hands of the recipient. The Finance Bill 2022 has defined cryptocurrency, NFTs, etc., as ‘Virtual digital assets’ (VDA). 

As per the existing income tax law, the person receiving gifts in the form of money, immovable property, or specified movable assets is liable to pay tax. However, gifts from specified relatives are exempt from taxation, irrespective of their value. For instance, if you have received gifts from siblings or your parents, you are not liable to pay tax. However, if you receive a gift valuing more than Rs 50,000 from a friend, you need to pay tax on such a gift amount.

Further, gifts received on specific occasions, such as on the occasion of marriage, via inheritance or a will or in contemplation of death of the donor, no tax is payable on the same, irrespective of the amount. 

To tax the gifting of virtual digital assets, the government has amended the existing provisions of the Income Tax Act. The government has included VDA within the scope of specified movable assets. Therefore, the recipient of the VDA is liable to pay tax if the same is received without consideration or for inadequate consideration. 

Where the VDA is received without consideration, and the fair market value (FMV) of such VDA exceeds Rs 50,000, the FMV of such asset will be taxable as income. Suppose the VDA is received for inadequate consideration, and the difference between the consideration paid and the FMV of the VDA exceeds Rs 50,000. In that case, the amount of FMV exceeding the consideration will be taxable to the beneficiary. However, clarity is required about the valuation of virtual digital assets. 

Additionally, the government has made no changes in the existing provisions that provide exemptions when the gifts are received by the relatives or received under a will or other situations specified in the Act. The interpretation of the current amendment suggests that the crypto tax doesn’t extend to gifts received on specific occasions or received from relatives, etc., and is hence, tax-free. It should be treated as akin to transferring money between relatives.

This amendment will take effect from FY 2022-23 and subsequent financial years.

For any clarifications/feedback on the topic, don’t hesitate to contact the writer at namita.shah@cleartax.in.