Cryptocurrency investors will be liable to pay capital gains tax on the sale of cryptocurrencies with effect from April 1. In the Budget 2022-23, Finance Minister Nirmala Sitharaman announced the imposition of tax at the rate of 30 percent.
This was done in the view of phenomenal increase in transactions in virtual digital assets, she had said. “The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent,” Ms Sitharaman had said during the budget speech.
Much to the chagrin of crypto investors, no deduction in respect of any expenditure or allowance will be allowed while calculating income barring the cost of acquisition. Loss from transfer of virtual digital asset cannot be set off against any other income.
Even any gift received will also be taxed in the hands of the recipient.
On an uneven keel?
Crypto exchanges, as expected, are not enthused by this change in taxation and they argue that taxation on crypto transactions should align with that on equity markets.
Ashish Singhal, Co-founder and CEO, CoinSwitch says, “Crypto assets are to public blockchains, what equities are to public companies. Taxes on crypto should therefore be at par with those in the equity markets.”
He says that Indian investors have already made more than $6 billion investment in cryptos, and prohibitive taxes are likely to unsettle the investors and expose them to possible losses, and possibly drive them out of an industry building the future of the internet in India
Mr Singhal says the lack of provision of offsetting losses is discriminatory.
“No provision for deducting expenses incurred or offsetting losses is not in tune with the tax framework for other asset classes and is discriminatory,” says Mr Singhal.
Nischal Shetty, founder or WazirX also argues against 30 percent tax rate.
He tweeted recently: "Discouraging Crypto = Discouraging Innovation. This is one of the top reason why countries around the world are taking cautious steps in Crypto taxation.."
About TDS
Besides capital gains tax, there is a provision of one percent TDS on crypto transactions beyond a certain threshold.
Mr Singhal condemns this rate of one percent by arguing that it could drive away users from KYC-complaint platforms to the grey market.
“A lower TDS can provide the government with the required tax trail without locking up the users’ capital. A higher TDS does not increase tax compliance, instead, it could drive away user,” he adds.
Although crypto tax at the rate of 30 percent without any provision of deductions is seen as arbitrary by some, the taxation experts have a different take on it.
Gaurav Mehta, Founder of ‘Catax — Simple Crypto Taxes’, says it’s not appropriate to find a connection between lack of regulatory framework and imposition of taxes on cryptocurrencies.
“When you earn money, you are liable to pay taxes. Regulation is a totally different aspect. However, there is no doubt that taxation is a positive indication because illegal activities are not taxed any way,” says Mehta.
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About the rate of tax also, Mr Mehta asserts that one percent TDS is reasonable if seen from the lens of an asset class. “Cryptocurrencies are not seen as currencies. If they are treated like an asset class, then one percent TDS is on the same lines as that on purchase of gold jewellery,” says Mehta.
About capital gains tax also, Mehta suggests that one should not see it only from the perspective of crypto exchanges.
“When we talk about 30 percent tax on capital gains, it is not exorbitant. There are several countries where rate of taxation is higher than this rate,” he adds.
Way forward
Moving forward, industry insiders argue that there could be a cohesive tax framework to encourage users to diversify their investments.
“A cohesive tax framework would encourage users to diversify their investments across asset classes, thereby promoting financial discipline. To further safeguard users, exchanges and platforms could be subjected to regulatory standards on operations, compliance and security. This will allow the industry to progress and crypto users to continue to benefit from their investments,” says Mr Singhal.