The government of India passed the cryptocurrency bill 2022, which introduced a new tax on cryptocurrencies. Cryptocurrency gains will get taxed at a rate of 30% beginning in April, the highest tax level and the same rate as lottery winners. That would apply to all “virtual digital assets,” including Bitcoin, NFT, and earnings.
Stock trading, on the other hand, has a tax rate that can range from 0% (if reported as business income based on tax slab) to 15%. (if filed as a short-term capital gain).
However, a tax rate comparable to that of the lottery is just the tip of the iceberg; to stay on the right side of the law in the fiscal year 2022-23, crypto investors will be mindful of other rules.
In 2021, India to have almost ten million cryptocurrency users, with a trading volume of around $100 billion. According to the creator of WazirX, an Indian crypto exchange, this might result in an additional $100 million (or 750 crores) in income tax in a year.
Cryptocurrency Taxation: Direct tax provisions in the Budget
All crypto income earned throughout the year will get taxed at a flat 30% rate according to cryptocurrency bill 2022. So, if a person buys a crypto asset for $10,000 and sells it for $12,000, they will make a profit of 2,000 and pay a 30% tax of 600.
A person who purchased a crypto asset that has considerably increased in value but has yet to sell it has made no earnings. Such crypto asset holdings that have not yet realized their gains will not be taxed unless a portion of them gets sold.
Similarly, if one is in a loss overall with no earnings, there will be no tax to pay after accounting for all crypto transactions done over the year.
Tax deduction at source (TDS): Nibbling away at the capital
The government has required a 1% TDS on all crypto transaction redemptions, which will probably get deducted by the crypto exchange. Even if you lose money, the TDS gets taken from the transaction value.
For example, if you purchased Bitcoin for 40,000 and sold it at the same price without making a profit, you would only receive $39,600. If you invest the same $39,600 in Ethereum or NFTs and sell at a loss, you will lose 1% to TDS and receive only $39,204. This TDS can get applied to the total amount of income tax owing at the end of the year.
Collecting 1% of each trade’s revenues would quickly deplete available capital. An investor who starts with any amount of money but loses practically all of it due to market fluctuations will get left with only half of what they started with by their 69th trade and only a quarter of what they started with by their 138th trade.
This impact of having people reconsider whether a potential deal is genuinely worth it, so curbing speculative trades, could be deliberate. Experts have predicted that once applied in July 2022. This TDS will significantly restrict the volume of crypto transactions in India.
It is the opportunity cost of holding money for up to a year while waiting for refunds on tax returns. However, if a person’s tax returns show an overall loss in crypto trading, the income tax department may refund the TDS deducted over the year.
Additional provisions that close loopholes
People who make the majority of their money from crypto assets may be able to claim it as a business expense. However, there will be no deductions for business expenditures on bitcoin earnings, making this option unappealing.
It will also be illegal to avoid the 30% crypto tax by declaring crypto profits as capital gains, which get taxed at up to 20% plus a surcharge.
In the case of cryptocurrency mining, the government is debating whether to tax it as a good or a service, bringing it under the GST umbrella. The government intends to impose GST on crypto trades conducted on overseas crypto exchanges.
Professionals and business people will be unable to deduct profits or losses from their primary income from their cryptocurrency income.
The 30 percent flat tax will also apply to crypto-based awards and gifts. As a result, currency or NFT ‘airdrops’ will not be complimentary. According to the Cryptocurrency bill, receiving crypto assets as a gift will not be free, as the recipient will be able to deduct tax at the source. Tax filings by crypto investors might still show business expense deductions for the period ending in March 2022.
By cryptocurrency exchanges like Wazirx, CoinCDX, Kuber you can buy.
Digital currency is a currency that is exclusively available in digital or electronic form. It is also known as electronic money, digital money, electronic currency, or cybercash.