Tax Computation on Earnings from Crypto Assets in India
The crypto tax in India
The Union budget in 2022 introduced a blanket 30% tax on all virtual assets including cryptocurrency. Under the set guidelines, any income made through capital gains from the transfer of digital assets would be subject to the tax, liable to be paid by the recipient including those who receive such assets as gifts. Other salient features include no cost deductions other than cost of acquisition. Then, any expenses like transaction cost or cost of mining will not be tax deductible. There is also no provision for losses incurred in one digital currency to be set-off against gains in any other currency. This implies that any loss made through trading in cryptocurrency (indeed, a recent Bitcoin slump by 12% wiped off $1 trillion from the market value) cannot be set off against any other type of income like from salary or property income and can neither be carried forward to be set off against other crypto income in future years. That is, a profit of Y on one investment and a loss of X in another does not entail a tax only on Y-X but on Y completely. Even though the legality of cryptocurrency and other digital assets in the country is a grey area, any gains made will also be subject to regular income taxation laws, further subject to potential surcharges, cess & TDA (estimated at 1%) liable on the recipient of any VDAs.
Different potential classifications of cryptocurrency
Depending on the nature of transactions, trade volume, frequency and investor intentions, gains from crypto trading could be classified as business income, capital gains or other income.
Higher trade volume and frequency will be considered as business income. Then all direct and indirect expenses could be deducted, and income taxed according to tax slabs, like how income is taxed in the country. Another implication would be the application of the Goods & Services Tax (GST). While there exists no nuanced guidelines on GST specifications for crypto trading, a general 18% may be applicable, especially with a business turnover of more than Rs 20 lakh.
Low trade volume and investor intentions of profits through long term appreciation would be classified as capital investments subject to capital gains taxation. Thus, any taxes on these capital gains would depend on timelines, i.e short and long term. Short term gains would be taxed at 15% while any long-term profits (> 36 months) would be taxed at 20%.
If classified as such, any gains from crypto trading would also be treated the same way as sources of income are taxed under the income tax laws today. There are discussions in the RBI regarding introducing cryptocurrency as a ‘speculative business income’ which would be subject to the highest tax slabs.
Calculating the tax on private crypto gains
Income from Bitcoin = Transfer Value of Bitcoin — Cost of Acquisition
With no cess/surcharge:
For any individual investing in cryptocurrency, let us assume an investment of 2 BTC, at Rs 1 lakh each. Say 1 BTC is sold at a loss of 70,000 (i.e sold at 30,000) while the other made a profit of 50,000 (i.e sold at 1.5 lakh). Then the tax breakup would be as follows:
= 0 tax on the Rs 70,000 loss + 30% tax on the Rs 50,000 profit
= Rs 15,000 tax despite an absolute cumulative loss of Rs 20,000 on the total investment.
Different surcharge rates can be applicable depending on taxable income and investor intention. This could be 10%, 15%, 25% and 37% of total income along with a cess applicable @ 4% of the tax and surcharge amount. As a result, the gains from the transfer of Crypto assets can be subject to effective tax at different rates like 31.2%, 34.32%, 35.88%, 42.744% etc.
In the same example, the total tax deductible at 10% surcharge
= 0 tax on Rs 70,000 loss + 30% tax on 50,000 profit + 10% surcharge on 50,000 profit + 4% on tax & surcharge amount
= 20,000 + 800 = Rs 28,000 tax
The Concept of TDS
The government has also mandated a 1% TDS which can be deducted to calculate total immediate cash flow, which could be filed separately from the government during income tax filings.
The concept of a TDS was introduced by the Indian Government to collect tax at the source of income. For cryptocurrency, a 1% tax on gains will be remitted instantly to the Central Government’s account. As per GoI guidelines, the buyer (‘the deductor’) would be liable to deduct the 1% TDS on behalf of the seller (‘the deductee’) if a transaction exceeds 10,000 rupees (about $132). Smaller trades would also be taxed if they top a cumulative 50,000 rupees in a financial year. Any exemption from the TDS could only arise from falling in categories which fall below the 10,000 threshold. According to Budget 2022, any individual with a business turnover of less than 1 crore, or compensation from profession less than 50 lakh or the value of consideration transferred in the form of VDAs is less than 50,000 would not be liable to pay the TDS.
This TDS can be claimed by following government guidelines after filing income tax returns. Refund claims are valid if the overall TDS set aside for that financial year for that individual exceeds their tax liability for that period. While filing ITR, the individual must mention their bank details, which if confirmed by the IT department, would refund the money into the individual’s account directly. Further, Section 197 allows any individual to file for refund by filling Form 13 for lower TDS reduction. The IT officer in charge would then issue a response certificate which can be submitted to the deductor. This process can now also be done online at the IT department’s official website.
General refunds take an average of 3–6 months. If the refund is late, the individual can claim an additional 6% interest on the refund amount, which is only applicable if the refund amount is less than 10% of the total tax payable for the given period.