Ten things to know about crypto taxation

While the blanket 30% tax for cryptocurrency investors is a big downside in itself, the government has also proposed that losses from crypto assets cannot be set off against any other income.

Tax Expert, Taapti Ghosh, Partner, Deloitte India; Naveen Wadhwa, Deputy General Manager, Taxman; Sandeep Jhunjhunwala, Partner Nangia Anderson LLP; and Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co, answer 10 key questions on crypto taxation. Edited excerpt:

How will crypto assets be classified now?

Wadhwa: The government did not clarify whether the digital asset would be a currency, commodity or security. In the absence of any such explanation, virtual digital assets should be classified as capital assets. Therefore, crypto assets should be considered a capital asset when purchased for investment. Therefore, any gain arising on transfer of such asset will be taxed as capital gain.

Do budget proposals legalize crypto assets?

Ghosh: The proposals introduce a scheme for taxation of income on transfer of digital assets. This does not mean that cryptocurrencies have acquired the status of legal tender. Validity should be granted under relevant regulatory provisions.

How will TDS work on transfer of Crypto Assets?

Wadhwa: A new section 194S has been added in the Income Tax Act to deduct tax from payment of consideration for transfer of digital assets. Tax is required to be deducted at the rate of 1% of the consideration. The rate will not be increased further by surcharge and health and education cess. If the deductor does not furnish his PAN to the deductor, tax will be deducted at the rate of 20% as prescribed under section 206AA.

What are the exceptions under the TDS rule for crypto?

Ghosh: If the payer is a specified person (an individual or Hindu undivided family, which is not subject to tax audit) and the total value of the consideration is less than that, then no TDS is applicable. 50,000 during the financial year. In other cases, no TDS is applicable if the consideration does not exceed 10,000 in total during a financial year.

Is TDS applicable if the asset is transferred to a personal wallet?

Jhunjhunwala: There should be no TDS on transfer of assets from crypto exchange to personal wallet or between individual wallets as normally TDS is applicable only if the investor receives any consideration in return for any of these transfers.

Can profit in bitcoin be set against loss in ether?

Singhania: While crypto investors will not be able to set off losses in other assets, a one-to-one correlation can be made between the sale and purchase of each cryptocurrency within the same financial year.

If I pay for pizza using bitcoin, will TDS be applicable?

Jhunjhunwala: As per the proposed TDS provisions, any person responsible for paying any amount to a resident for transfer of virtual digital assets is bound to deduct tax at the rate of 1%.

By reading the crypto provisions, the way it is written in the budget, the pizza seller will have to deposit 1% TDS to the government. Further clarification is needed from the government on this front.

How will crypto tax apply to NRIs or foreigners?

Ghosh: A non-resident in India is taxed on income which is received or deemed to be received in India or accrues or accrues or deemed to be in India. The place of realization of return on transfer of digital assets will be important and need to be clarified. In addition, income deemed to accrue in India includes income by way of any property or assets in India or by way of transfer of capital assets located in India. Given the virtual exchange environment, the location of digital assets in the case of a non-resident can be a matter of dispute. Suitable guidelines on the same need to be notified.

Whether surcharge and cess will be applicable on the above people 50 lakh income?

Ghosh: Yes, surcharge will be applicable on the tax computed on transfer of digital assets where the total income is higher 50 lakhs. Cess will be applicable in all cases.

What are the rules for giving gifts to relatives and non-relatives?

Ghosh: Gift of digital asset will be taxable in the hands of the recipient if the value of the asset is high 50,000 However, if these are received from relatives as defined, the income will not be taxable. Guidance on valuation of such properties is awaited.