Explained: How the 2022 budget announcements affect your income from crypto investments

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Grant Thornton Budget Explanation: Over the past few years, “cryptocurrency” has become a hot investment topic, especially among younger investors. Even the most avid investors, who traditionally invest money in safer avenues, have been bitten by the virus to explore this new digital asset. So if you’re one of those people who have made investments or explored “cryptocurrency” as an asset class, the recent budget released guidance clarifying how it will be taxed, but there remains a few more question marks. how certain layouts will play. For example, if a GST will be applicable. Firstly, there have been a number of theories around cryptocurrency, particularly about its legal validity and the tax game surrounding it in the Indian context, some of which are still ambiguous. So let’s try to dig deeper to understand how far the budget has now made the big canvas clear on cryptocurrency. Go from PDA to Crypto: The Government Now Calls It VDA If you are a “cryptocurrency” enthusiast or investor, the budget has now clearly laid out a few guidelines and regulations pertaining to it. Finance Minister Nirmala Sitharaman has announced that there will be a 30% tax on cryptocurrency income. For tax purposes, cryptocurrencies are now included in the definition of virtual digital assets (VDAs). For the calculation of this income, only the cost of acquisition should be allowed as a deduction, which means that no amount relating to other expenses (any transaction cost, interest cost of borrowing, etc.) can be deducted. However, the basic exemption limit (Rs 2,50,000) is not applicable on cryptocurrency transfer income. However, if the ARV transfer results in a loss, that loss cannot be offset by any other income, nor can that loss be carried forward to subsequent tax years. Read also: Budget explainer: Owning shares in a startup? How your investment will be affected The VDA also includes non-fungible tokens (NFTs). NFTs are unique, non-interchangeable digital tokens that can be traded using cryptocurrency. As such, the current regulations will impact your overall income from cryptocurrencies due to the taxation imposed, but it also puts an end to confusion and uncertainty as the government has recognized cryptocurrencies as a VDA for tax purposes and created a framework for it. Accounting profits before March 31: It’s highly taxable and still cryptic to come Since the new guidelines will come into effect from April 1, 2022, the writing on the wall is very clear – unless you are very optimistic about your crypto investments, liquidate them to reserve your profits now, so you can explore options to save potential taxes. The taxation prior to April 01, 2022, is still ambiguous with a lack of clarity, but however the taxation may depend on the treatment adopted by the taxpayer. If the income from the cryptocurrency transfer is considered business income, the tax rate may still be similar, except that there may be a deduction for fees or expenses incurred. If the income is chargeable as a capital gain, then the long-term capital gain (where the crypto is held for more than 36 months) could be taxed at the rate of 20% and if the crypto is held for less than 36 month, then the taxation will be according to the slab rate applicable for individuals. Additionally, to regulate and capture transaction details, taxes will be withheld (TDS) from the payment made to the cryptocurrency seller by the crypto exchange or other payer at 1%, if the total payment during the tax year is more than INR 10,000. These provisions are applicable from July 1, 2022 and primarily require crypto exchanges to deduct taxes, if any. Additionally, the gift of VDA will be taxed in the hands of the recipient. Such taxation will only arise if the value of the ARV exceeds Rs 50,000. But, there will be no tax liability in case of receipt of such assets through a relative as defined by tax law or on the occasion of a marriage, etc. While the step taken by the government to recognize and regulate cryptocurrencies through a fiscal framework is a welcome step, there are still some ambiguities, such as whether it is a valid legal tender. , which need to be resolved and worked out. Illustrative: Mr. Ravi, a resident of Gujarat, is an employee working for an Indian IT company. Consider that he has the following income for the financial year 2022-23: Income under Salaries – INR 25,00,000; Interest from fixed bank deposits amounting to INR 50,000; He sold 1000 shares of Infosys at 1600 per share on January 30, 2023 which he bought on December 20, 2021; He sold bitcoins worth INR 600,000 on December 30, 2022 which he bought on April 12, 2022; He gifted bitcoins worth INR 200,000 to his friend Subhash on his birthday. Consider the following: Case 1: The cost of acquiring bitcoin is INR 9,00,000 excluding brokerage fees and other fees of INR 10,000. In addition, the cost of acquiring shares of Infosys is INR 1,000 per share; Case 2: The cost of acquiring bitcoin is INR 300,000 excluding brokerage fees and other fees of INR 25,000. In addition, the cost of acquiring shares of Infosys is INR 1,800 per share; Now let’s try to calculate the total income and the tax to be paid by Mr. Ravi for the financial year 2022-23/AY 2023-24: the income. Therefore, in case 1, the loss of INR 300,000 resulting from the sale of bitcoins is not compensated by the gains of INR 600,000 resulting from the sale of shares of Infosys or IFOS. 2) No deduction for any expense other than the cost of acquisition is permitted when computing income from the transfer of virtual digital currency. 3) Therefore, brokerage and other fees have not been taken into account. 4) No other loss or compensation can be deducted from the earnings from the transfer of virtual digital currency. Therefore, in case 2, the loss from the sale of Infosys shares amounting to INR 200,000 cannot be offset against the gains of INR 300,000 from the sale of bitcoins. 5) In addition, the loss resulting from the sale of virtual digital currency cannot be carried forward to subsequent tax years. 6) Additionally, in accordance with the proposed changes, bitcoins worth INR 200,000 will be offered for tax by Subhash, under the title IFOS when filing his individual tax return. The amendment is a welcome step to clarify the tax aspect. However, it is pertinent to note that cryptocurrency trading/trading was not legalized in this budget. Clarifications are awaited in this regard. Key points that still require clarification from the governmentWhile a taxation scheme has been planned for the VDA, some ambiguities remain around the taxation of the VDA. 1) While the taxation of transferring VDAs has been clarified, there is no clarity on the taxation of activities such as the development and creation of VDAs. 2) If a person pays for a good or service in cryptocurrency, whether the payment will be considered a method of payment or a sale of cryptocurrency to another person for goods or services. This raises the question of whether the buyer of goods/recipient of services will have to pay taxes separately on this transaction by considering it a “transfer” of VDA. If the seller of goods/service provider will need to deduct TDS when receiving payment through VDA. 3) Cryptocurrencies are mainly bought and sold in foreign currencies. Therefore, an increase or decrease in the value of the rupee will also cause the gain or loss to fluctuate. How should gains/losses resulting from forex fluctuation be treated? Although the government has clarified its position from an income tax perspective, no clarity has been provided regarding cryptocurrencies from a GST perspective. There are various aspects on which clarity is required under GST law so that investors are sure of the implications of GST and are able to make more informed decisions. Primarily, here are some of the main areas where the government needs to provide clarification: a) Is the GST applicable? b) If yes, the nature of the cryptocurrencies – goods or services? c) Implication of GST on transaction fees/rewards for miners, exchanges where consideration is paid in cryptocurrency. d) Implication of GST when cryptocurrency is used to acquire goods or services e) The government is likely to introduce cryptocurrency legislation which will provide a framework on how cryptocurrencies and their use will be regulated. It is also expected that alongside this, the government will provide definitive guidance from a GST perspective, including the points mentioned above. (This post-budget 2022 analysis was done by Grant Thornton Bharat)

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