Income Tax on Cryptocurrency income : TDS, loss, Reporting

Income Tax on Cryptocurrency : This budget 2022-23 has brought some clarity on taxability of “Digital Currencies” in India. Crytpocurrency like bitcoins, dogecoins, etherum, sand tokens, matic coins etc, has gained much popularity now for the purpose of trading and investment. The government will be launching one of their own as well. Cryptos has been brought under the tax bracket of 30% just like winning lottery, puzzles with many provisional strings. The Income tax rules on cryptocurrency and other virtual digital assets will be applicable from 1^st April 2022 i.e., FY2022-23. There so many strings attached in this crypto and that has led to increase in complexities in the same. Now let understand the taxation related to cryptocurrencies in details.

What is virtual digital assets?

Virtual digital assets or cryptocurrencies means–

(a) any information or code or number or token (not being currency), generated through cryptographic means which provides-

a digital representation of value exchanged,
having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment,
but not limited to investment scheme; and
can be transferred, stored or traded electronically;

(b) a non-fungible token

Income Tax Rate on Cryptocurrency

In this budget, FM announced that Income from transfer of virtual assets or Cryptocurrency to be taxed at 30% under section 115BBH plus cess at 4%, irrespective of how long the asset has been held. No deduction except cost of acquisition will be allowed and no loss in transaction will be allowed to be carried forward.

Let’s understand the 30% taxability with an example-

BabaTax bought bitcoins at Rs 100, and sold them for Rs 150 and incurred expenses of Rs 10, now BabaTax will have to pay Rs 15 as income tax based on 30% rate on the profit part (Rs 150- Rs 100). No deduction for any expenses.

TDS on Crypto transactions

Since, the craze of the crypto is so high and investment scope is so widened, due to which they have proposed a 1% tax deduction at source on payments made related to transfer of virtual assets to keep the eye on the transactions. From 1^st July, 2022, a new section 194S inserted for deducting TDS @ 1% for transfer of virtual digital asset. TDS will be applicable, where transactions in a financial year in an aggregate exceeds the limit.

The limit for TDS deduction is Rs 50,000 for –

Individual or HUF, whose total sales, gross receipts or turnover from the business does not exceed Rs 1 crore.
Individual or HUF, whose total sales, gross receipts or turnover from profession does not Rs 50 lakh.
The Individual or HUF, not having any income under the head “Profits and gains of business or profession”.

For person other than above, TDS will be deducted where transactions in a financial year aggregate exceeds ₹10,000

Crypto Loss Set off and Carry forward

Loss from transfer of digital asset cannot be set off against any other income and also this loss cannot be carried forward. Due to this, a major problem has shown up that people are afraid from investing in cryptos and other digital currencies from now on.

Income Tax on Gifting the cryptocurrency

Government is trying to cover up every possible loop hole with respect to tax evasion in crypto, so they have even made crypto gifting taxable in the hands of the recipient.

How to report in ITR forms

Income tax return forms from next year will have a separate column for making disclosures on gains made from cryptocurrencies and paying taxes, Revenue Secretary Tarun Bajaj said. He also said, “For transactions before April 1, you will show in some head in your ITR and the Assessing Officer will do an assessment for you”. “The Assessing Officer will take a call on what head crypto gains should be charged,” the Secretary said.

Before budget income tax on crypto-currency

Before the budget, tax professionals were treating the income from cryptocurrencies either under the head of business or head of capital gains. This may be continue till 31^st March 2022 since no clarity is received for treatment in FY 2021-22.

Taxability as capital gains:

If someone is holding cryptos as investments, then sale were reported as capital gains/loss. In case they have held it for more than 36 months, then the gain from this could be classified as long-term capital gains and be subject to tax at 20%, plus applicable surcharge and cess. Otherwise, they were classified as short-term capital gains, subject to tax at the applicable personal taxation rates. But long-term capital gains, indexation benefit could be availed to increase the cost on account of inflation.

Taxability as business income:

Those who hold cryptos as stock-in-trade, they had taxed under the head business income. The income after netting of expenses like purchase cost for cryptos, depreciation on computers/ laptops, salary, rental expense, cost for maintenance of accounts and others from such activity of trading taxed as business income.