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With the new taxation reforms, Why is there so much cry in the Cryptocurrency market today?

With the new taxation reforms, Why is there so much cry in the Cryptocurrency market today?

A cryptocurrency can be defined as a decentralized digital asset and a medium of exchange based on blockchain technology. In layman language, cryptocurrencies are digital currencies designed to buy goods and services, similar to our other used currencies. However, since the beginning, it has largely been controversial due to its decentralized nature, meaning its operation without any intermediary like banks, financial institutions, or central authorities.

Today, more than 1,500 virtual currencies, such as Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic, etc., are traded in the digital currency world. The investment and trading volume of cryptocurrencies has increased multifold since the nationwide lockdown. The crypto investments have grown despite any precise regulation from the Indian Government or Reserve Bank of India.  

Legality of Cryptocurrency

So far, the Indian government has not yet granted any status of legal tender to cryptocurrencies. In 2018, RBI tried to impose a ban by restricting banking facilities to the crypto exchanges. However, the ban was ruled out by the Supreme Court on constitutional grounds and virtual exchanges fundamental rights.

Taxation:

From 1st April 2022, some changes in the income tax rules announced by Finance Minister Nirmala Sitharaman while presenting the Union Budget 2022 will be implemented. One of them is a tax on cryptocurrency and other digital assets. Nirmala Sitharaman in the Union Budget 2022 announced that “any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent."

Since the cryptocurrency is not yet legalized by the Reserve Bank of India (RBI), it cannot escape from taxability. An investor earning profits from the sale of cryptocurrency must pay income tax.

All incomes, except exempted explicitly by the Income Tax Act, are subject to tax. Till we receive any clarification from the income tax department, investors must pay income tax on the crypto-transactions based on the nature of the transactions.

As per the standard income tax rules, the gains on the crypto-transactions would become taxable as (i) Business income or (ii) Capital gains. This classification will depend on the investors’ intention and nature of these transactions.

If there are frequent trades and high volumes, gains from the cryptocurrency transactions will be taxed as ‘business income’.

However, they will be taxed as ‘capital gains’ if the purpose of owning them is primarily to benefit from longer-term appreciation in value with fewer trades.

The nature of classification has to be reviewed for every taxpayer, and taxpayers must take the help of an expert for accurate reporting.

Recent News:

“The new regime of flat 30% taxation on income from crypto assets from April 1, 2022, will ebb the sentiments for the new age asset class. Though, we hope that the crypto investors will back their investment thesis and stay with the investment for longer periods," said Kunal Jagdale, Founder, BitsAir Exchange.

 

Tax @ 30% on Digital Assets: The gain on the sale of cryptocurrency would be taxed at a 30% tax rate. This taxation would certainly impact post-tax returns of cryptocurrency transactions. “Only deduction from sale consideration can be the ‘cost of acquisition of cryptocurrency’. There won’t be any other expenses allowed to be deducted. Due to no set-off of loss from other sources of income, it will become very challenging to have a net profitable trade in cryptocurrency," said Sujit Bangar, Founder, Taxbuddy.com

2) If you have purchased crypto for Rs.15k and sold it for Rs.45k, your straightforward gain is Rs.30k.

It would be taxed as under:

Sale consideration Rs.45k, less cost of acquisition Rs.15k, Taxable gain Rs.30k and hence, Income Tax @30% is Rs.9k.

3) TDS on cryptocurrency transactions: TDS @1% has been proposed for transactions involving cryptocurrency. Sujit Bangar, Founder of Taxbuddy.com said that we may sell cryptocurrency at a profit or loss but TDS @1% would certainly happen. “We can claim a refund of TDS done on a transaction involving loss. Therefore, it would be recommended to file an income tax return if you have entered into transactions in cryptocurrency," added Sujit Bangar.

4) The threshold limit for TDS would be Rs.50,000 a year for specified persons, which includes individuals/HUFs who are required to get their accounts audited under the I-T Act.

5) The provisions related to 1 percent TDS will come into effect from July 1, 2022, while the gains will be taxed effectively April 1.

6) Crypto received as a gift would be taxable: If you receive a gift in form of cryptocurrency or any other virtual digital asset, it would be liable for taxation as a gift post-budget 2022.

7) Finance Minister Nirmala Sitharaman said that the scheme would not allow any deduction in respect of any expenditure or allowance while computing such income except the cost of acquisition.

8) The Lok Sabha approved taxation rules on virtual digital assets (VDAs) or "crypto tax" that was proposed in Budget 2022-23 by clearing the Finance Bill 2022.

9) Under the bill, section 115 BBH deals with taxes on virtual digital assets, while clause (2)(b) prohibits setting off a loss from crypto assets against income under "any other provision" of the IT Act. Also, the word "other" is dropped for VDAs under the bill.

10) The loss from the transfer of virtual digital assets (VDA) will not be allowed to be set off against the income arising from the transfer of another VDA.

Ministry of Corporate Affairs (MCA) mandatory compliance in disclosing gains and losses in virtual currencies. Also, the value of cryptocurrency as on the balance sheet date is to be reported. Accordingly, changes have been made in schedule III of the Companies Act starting from 1 April 2021. This mandate can be considered as the first move of the government towards regulating cryptocurrencies. 

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