Trading/investing in crypto and digital assets will be taxed at 30%! This came like a bolt out of the blue to the common people as the Indian Government announced the Budget of 2022 session. Is the tax law really as bad as it sounds? Or are there some positives in the law too? Read more to know.

At first, this may sound like a very negative news, but let us know the facts clearly.

Going by the trends, every country will tax cryptos in some way or the other. More than 2 crore Indians have invested in cryptos. We Indians hold more than Rs. 40,000 crore in crypto assets, so it becomes a necessity of the government to impose rules and taxations from crypto trading.

Since there were no rules till the last month, many were in a dilemma of whether crypto investing/trading was legal or not.

What is Cryptocurrency?

A cryptocurrency is a marketable digital asset or digital form of money that is exclusively available online and is based on blockchain technology. Cryptocurrencies, as the name implies, use encryption to authenticate and protect transactions. There are over a thousand distinct cryptocurrencies in use today, and proponents see them as the way to a more equitable future economy.

However, it has been contentious since its inception due to its decentralised nature, which means it operates without the use of any intermediaries such as banks, financial organisations, or central agencies.

Is crypto a ‘currency’ or an ‘asset’?

Tax experts have been speculating about the division of cryptocurrency between ‘money’ or ‘assets’. Cryptocurrency and crypto-assets names are widely used interchangeably.

However, classifying it as a ‘currency’ requires legal support from the government, if not where it is safe to classify it as an asset.

Since the impact of taxes can arise without regard to legal status, classifying oneself as ‘property’ could be a much better option than any government definition.

Close up shot of memorial coins of bitcoin, litecoin and ethereum on a screen displaying binary code .

Signs of progress in the Indian Crypto Market

Crypto currency debates in India date back to 2013. The RBI warned trade for virtual currencies at that time.

However, because banks have continued to empower cryptocurrency exchanges, the Reserve Bank of India (RBI) issued a circular in 2018 urging commercial banks and partnerships to stop allowing money to be used for cryptocurrency trading. The cryptocurrency limit of the RBI was later lifted by the Supreme Court of India in March 2020.

In India, the year 2021 will be remembered as a sudden rise in the interest and knowledge of cryptocurrency. Prohibitions and laws sparked speculation. The Inter-Ministerial Committee (IMC) has been set up by the government to investigate issues relating to digital tokens.

Honourable Prime Minister of India, Mr. Narendra Modi chaired a high-level meeting near the end of the year, during which he stated the government’s strong opposition to cryptocurrency ventures.

The Crypto and Digital Asset Laws simplified

In the Union Budget 2022, crypto assets along with Non fungible tokens (NFT’s) have been classified as ‘virtual digital assets.’

Now let us understand more about the taxation process:

1: There will be a 30% tax on the transfer of virtual digital assets.

You need to pay this tax only on realized gains. No deductions will be allowed except the cost of acquisition of digital assets. Even a student who doesn’t fall under any tax slab has to pay this tax to the government. Gifting of digital assets will also be taxable in the hands of the receiver.

Now you may ask, what is this realized gains? Let me explain.

It refers to the profits earned from selling an asset at a price higher than the original price at which the asset was purchased. So, till the time you don’t sell your crypto, you don’t need to pay any tax regardless of the time you hold it in your portfolio.

A common misunderstanding among people is that they think till the time, they don’t transfer the profits to the bank and keep them in their wallet, they are tax-free. This is a misconception, the moment you book your profits, you are liable to pay taxes on them regardless of where you keep them.

2: You will be taxed on your net profits only.

For example, a person invests in both Bitcoin and Litecoin. When he sells them, Bitcoin is in profit but Litecoin is in losses and you have a profit of Rs. 70,000 in BTC while a loss of Rs. 50,000 in Ethereum.

If you sell them in the same financial year, your tax will be 30% of Rs. (70,000-50,000) i.e. 30% of Rs. 20,000 which is your net profit and it will amount to Rs 6000 and the surcharge and cess will be extra

Again, remember that you can’t combine these profits with other classes of assets. For example, you booked profits in cryptos but you booked losses in stock trading. You can’t reduce this loss from the gains of crypto profits.

The second thing is that the net profit is calculated on the basis of a financial year. Once the financial year is over, so is your calculation of profits and loss. I mean that if you have booked a loss the previous year and a net profit this year, you can’t carry forward the losses this year to escape from the taxation.

The Government of India has signaled every crypto exchange to cut a 1% TDS on every sale transaction. TDS which means tax deduction at source will ensure that a record of your transactions reaches the Government.

How do other countries tax the crypto industry?

In the United States of America, the IRS considers the profits from cryptocurrency as part of your capital gains. Therefore, the cryptocurrency tax rate for federal taxes is the same as the capital gains tax rate. In 2021, it ranges from 10-37% for short-term capital gains and 0-20% for long-term capital gains.

In Australia, Cryptocurrency is considered an asset and therefore is subject to Capital Gains Tax and Income Tax by the Australian Taxation Office (ATO). You must declare your cryptocurrency totals on your Income Tax Return if you acquired, sold, or earned interest from cryptocurrency in the previous financial year.

In Singapore, cryptocurrencies are likewise excluded from capital gains taxes to promote the environment of crypto in the country. Businesses that acquire and sell digital tokens in the usual course of business are taxed on the profit generated by digital token trading.

In the United Kingdom, you will get taxed on the profits you make if you buy or ‘dispose’ of cryptocurrency as a personal investment. ‘Disposal’ means and includes selling tokens for money, exchanging tokens for a different type of token, using tokens to pay for goods or services, or giving away tokens to another person.

Conclusion

Till government gives a firm stance, we shouldn’t hastily make any decisions. We can assume that Government will also regulate the crypto markets as the government authorities like SEBI regulate and protect the investors in the stock market. it is a positive step towards legitimizing crypto and hints at an optimistic sentiment towards further acceptance of crypto and NFTs.

According to tax professionals, it is expected that Individuals could end up paying more than 30% of their crypto income in taxes and other fees. Taking into consideration of the surcharge and cess, the net deductions in profit will be close to 42%.

I personally think that the process of taxation is good and it ensures that crypto transactions are legal in India. The problem is with the taxation amount. It is the same as the taxation for gambling processes. It somehow means that the Government is wary of crypto and does not want us to heavily invest in crypto.

That’s all for now friends. Subscribe to our newsletter to keep reading our articles. Feel free to post your doubts in the comments and we will reach out to you.

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