Following a period of extremely long uncertainty marked by the RBI’s pessimism toward virtual digital assets, a new tax structure for cryptocurrencies was ultimately unveiled in this year’s budget. And it went into effect on April 1, with the start of the new fiscal year.
According to industry estimates, India has 15-20 million crypto investors with $6 billion in holdings. The industry saw the advent of a separate taxation structure as a relief since it gave cryptocurrency legitimacy. But it doesn’t appear to have been much of a relief.
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In layman’s terms, cryptocurrencies are digital currencies that can be used to buy goods and services in the same way that other currencies can. However, it has been primarily contentious from its inception owing to its decentralised structure, which means it operates without the need of any intermediaries such as banks, financial organisations, or central agencies.
In today’s digital currency world, more than 1,500 virtual currencies are exchanged, including Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic, and others. Since the nationwide covid lockdown, the amount of money invested in and traded in cryptocurrencies has skyrocketed.
Economies all across the globe are adopting their own crypto policies, which are vastly different from one another. Cryptocurrency has long been recognised as a capital asset in the United States, subject to both short- and long-term capital gain taxation by the receiver.
Surprisingly, if no gains are booked, this suggests no tax burden. Furthermore, taxation rules in developed economies appear to be far more nuanced than India’s 30% tax policy.
Cryptocurrency is recognised as a capital asset in Canada as well. It is well susceptible to income taxes if recognised as a portion of income.
Other nations, including the United Kingdom and Australia, have a more flexible approach, classifying cryptocurrency as income or assets based on how it affects individual income, whether through capital gains or direct income.
Other large economies, on the other hand, have embraced cryptocurrency with more liberal taxation regulations.
For example, Germany, Europe’s largest economy, regards cryptocurrency as a private asset, meaning total tax exemption if any sales are made after a one-year holding period.
Portugal, for example, has no tax policy for individual crypto owners, however, firms or individuals trading professionally are subject to conventional income tax if crypto is included as income.
The announcement by the Indian government in Budget 2022 of a flat 30% tax on income from the transfer of virtual digital assets (VDAs), including cryptocurrencies and NFTs, has been welcomed by the Indian crypto community.
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Despite the fact that the VDA tax rate is high, they are pleased that crypto has earned some legitimacy by being mentioned in official Budget papers for taxes purposes.
However, Finance Minister Nirmala Sitharaman has stated that the enforcement of taxes on revenue from VDAs, including cryptocurrency, does not imply that they have been declared legal.
While the bill to govern virtual digital assets will provide considerable clarification on the legality of Crypto, a number of crypto investors are unclear about how to calculate their tax due.
Infrastructure expenditures paid in the mining of cryptocurrencies or other virtual digital assets would not be deductible under the Income Tax Act, according to Minister of State for Finance Pankaj Chaudhary.
Furthermore, loss from the transfer of virtual digital assets (VDA) would not be permitted to be set off against revenue from the transfer of another VDA, according to Chaudhary.
These taxes would very probably have an effect on the post-tax returns of cryptocurrency transactions. Only the ‘cost of acquiring cryptocurrency’ can be deducted from the sale consideration. Other expenditures will not be permitted to be deducted.
For example, if you bought cryptocurrency for Rs 15,000 and sold it for Rs 45,000, your net gain is Rs 30,000. Let’s compute the tax on the amount withdrawn; the selling consideration is 45,000, and if the cost of purchase is deducted, which is Rs 15,000, the taxable gain is Rs 30,000, and the income tax imposed at 30% is Rs 9,000.
There will also be a 1% TDS and gift tax under specified situations, which must be paid by the receiver of the digital asset as a gift. The provisions relating to 1% TDS will go into effect on July 1, 2022.
TDS is an obligation imposed on exchanges that deposit tax on behalf of platform sellers. It will be assessed at 1% of the transaction amount.
It is currently unknown how TDS will be computed and how exchanges would share data with the government. The sector is looking for clarification on two fundamental issues: trading and swapping virtual digital assets (VDA).
This means that investors would lose 1% of their capital on each deal. While any TDS amount in excess of taxes payable will be reimbursed in the end, it would have a debilitating effect on capital for day traders and short-term investors.
The crypto community has urged that the 1% TDS law be repealed, or at the very least reduced to 0.01%. The industry calls for a TDS reduction of 0.01% as a win-win situation for all sides. Market participants are concerned that higher TDS would reduce the fair market price.