Cryptocurrency Tax Calculation: What will be Taxed, What won’t, How and When?

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How to calculate tax on income from cryptocurrency: The announcement of flat 30% tax on income from transfer of virtual digital assets (VDAs) including cryptocurrencies and NFTs in Budget 2022 has been welcomed by crypto community in India. Even as the VDA tax rate is high, they are happy with the fact that crypto has gained some recognition by finding a mention in official Budget document for taxation purpose. However, Finance Minister Nirmala Sitharaman has clarified that imposition of tax on income from VDAs including crypto doesn’t mean they have been declared legal. While much clarity on the legality of Crypto will come through the upcoming bill to regulate virtual digital assets, a number of crypto investors are confused about calculation of their tax liability. If you are also unsure about crypto taxes, read on to find answers.

Cryptocurrency, Budget 2022, Nirmala Sitharaman, Tax

Budget 2022 has proposed to introduce a new Section 115BBH for taxation of persons whose sources of income include income from transfer of VDAs. “The proposed section 115BBH seeks to provide that where the total income of an assessee includes any income from transfer of any virtual digital asset, the income tax payable shall be the aggregate of the amount of income-tax calculated on income of transfer of any virtual digital asset at the rate of 30% and the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of the income from transfer of virtual digital asset,” Budget 2022 Memorandum said.

As per the Budget Memorandum, total tax liability of an individual invested in cryptocurrency or other VDAs will be the sum of income from transfer or transaction of such assets and the tax s/he would have paid even without crypto income, Balwant Jain, Tax and Investment expert, said.

“Flat 30% tax will apply on profit from transfer or sale of digital assets including crypto and NFTs from next financial year (FY 2022-23). Investors should also keep in mind that crypto losses can’t be set off or carry forwarded,” Jain told FE Online.

Explaining the above statement further, SR Patnaik, Partner & Head – Taxation, Cyril Amarchand Mangaldas, said, “It means that in case any taxpayer has earned any income from the transfer of a virtual digital asset, the said income shall be subject to tax at the rate of 30%. While calculating the income from this source, any other income earned by the taxpayer from another source of income shall be ignored. This source cannot be combined with any other source of income. If the net income from this source is positive, the same amount shall be chargeable to tax at the rate of 30%.”

“The statement essentially implies that an additional taxable income source has been recognized – which is income arising from from transfer of any virtual digital asset (VDA). By way of example, if the total taxable income of an assessee is Rs. 1,00,000, of which Rs. 20,000 is the income from income from transfer of VDA: Rs. 6,000 will be amount of income tax on this (@30%), and Rs. 80,000 will be subject to such other applicable slab rate, depending on the source of income,” Rishi Anand, Partner, DSK Legal said.

When will you have to pay 30% tax on income from cryptocurrency, NFT?

According to the Budget document, 30% tax on cryptocurrency and other VDAs would be applicable from Assessment Year 2023-24. That means all your income from crypto transactions in FY 2022-23 will be taxed at the rate of 30%.

Investors can pay tax on income from crypto and NFTs till the end of FY 2021-22 as per the existing taxation rules, said Jain.

Tax calculation: Will you have to pay tax on both gains and losses from crypto?
Losses arising from transfer of crypto assets cannot be set off against any other income and also it cannot be carried forward. “However, the loss arising from transfer of crypto assets can be set off against gain arising from the transfer of crypto assets in the same financial year,” Dr Suresh Surana, Founder, RSM India, said.

Sharing an example, Dr Surana said: “For instance, an individual has salary income of Rs.20 lakh, gain on sale on Bitcoin of Rs 5 lakh and loss on sale on Ethereum of Rs 2 lakh. S/he can set off the loss and the net gain from the sale of crypto assets (both Bitcoin and Ethereum) of Rs 3 lakh would be subject to tax @30% plus applicable surcharge (nil in this case) and cess (1.2% viz 4% of 30% tax) resulting in an effective tax rate of 31.2%. The salary income of Rs.20 lakh will be subject to tax at the normal tax slabs ranging from 5% to 30% (plus surcharge and cess) and would also depend on whether the assessee has opted for the optional tax regime under section 115BAC of the IT Act or the pre-existing tax slabs.”

Professor Ankur Sinha, Associate Professor, Production and Quantitative Methods, at IIM Ahmedabad said that only gains will be taxed, losses will not be taxed.

“However, any loss incurred because of investments in this asset class cannot be set-off against income from any other sources. In other words, if you incur a loss of (X) from investments in crypto and a profit of Y elsewhere, you cannot claim that you would pay a tax on Y-X. On the other hand, if you get a profit of X from investments in crypto and a profit of Y elsewhere, you will have to pay taxes on both X and Y,” ” Prof Sinha said.

Will you have to pay more than 30% tax on crypto income?

While further clarity is required from the Government in this regard, experts’ views differ on whether a crypto investor would have to pay just 30% tax or effectively more than that due to sucharges.

The effective tax to be paid on income from transfer of cryptocurrencies, NFTs or other virtual digital assets may be more than 30% as this flat rate is exclusive of applicable surcharge and cess.

As seen in the above example also, effective tax on income from crypto transactions may be more than 30%.

“The taxation of gains arising on crypto assets is 30% plus surcharge and cess. The surcharge is applicable at the rate of 10%, 15%, 25% and 37% of the tax amount depending on the taxable income and cess is 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 the rate of 31.2%, 34.32%, 35.88%, 39% and 42.744% depending on the taxable income in case of individuals/HUFs,” Dr Surana said.

However, Patnaik thinks that actual tax to be paid on income from crypto will not be more than than 30%.

“For example, suppose Mr X invests US$ 100,000 in cryptocurrencies and gets 10,000 units. He decides to sell them in 5 installments of 2,000 units each and receives US$ 15,000, US$ 25,000, US$ 40,000, US$ 75,000 and US$ 5,000 only. Thus, against an investment of US$ 100,000, Mr. X ultimately received US$ 160,000. Hence, he will be liable to pay tax @30% on the net income of US$ 60,000 which shall be US$ 18,000 (i.e. 30% of US$ 60,000). This will be clubbed with his other income and he will have to pay tax on his total income accordingly along with the applicable surcharge and education cess,” Patnaik said.

Will you have to pay tax on income from crypto or NFT airdrops?

Not just crypto investors, those who have received airdropped crypto tokens or NFTs as gifts will have to pay tax too, according to Sharat Chandra, VP- Research and Strategy , EarthID, a self-sovereign Identity Management Platform.

“The finance bill memo explicitly states that no deduction in respect of any expenditure (other than cost of acquisition of digital asset) or allowance or set off of any loss shall be allowed to the assessee under any provision of the Act while computing income from transfer of virtual digital assets. Crypto investors can not set off any loss arising from transfer of virtual digital assets and such loss will not be allowed to be carried forward to subsequent assessment years. Surpluses will be taxed and losses cannot be used to offset against profits. Those who receive Airdropped tokens as gifts will have to pay tax too,” Chandra said.

Will you have to pay tax for holding crypto?

You will have to pay tax only when you earn an income from transaction, transfer or exchange or crypto or other virtual digital assets. No tax is to be paid for holding crypto, according to experts.

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