Tax on cryptocurrencies: Book gains and escape crypto tax before March 31, say experts

Cryptocurrencies will now finally be taxed in India. In her Budget speech on February 1, Finance Minister Nirmala Sitharaman said the transfer of digital assets - and these includes cryptocurrencies and non-fungible tokens- will attract a 30 percent tax. Additionally, all transfers of such assets will attract 1 percent tax deducted at source (TDS). Even gifting such assets will attract the 30 percent tax.

While we await clarifications and a detailed order by the tax department on how this would be implemented, Moneycontrol spoke to chartered accountants to get answers to some of the most frequently-asked questions to get a sense of the  impact it will have on you. Here’s what they had to say:

Karan Batra, founder of Chartered Club, a tax consultancy

The new provision to tax cryptocurrency gains at 30 percent will come into force from April 1, 2022. So, it will not affect those who sell their crypto holdings this financial year. They can look at booking profits or losses before March 31, 2022. So, if you are sitting on gains and sell your holdings in this financial year, then these would not be taxed at 30 percent, which will be the case after April 1. The price of Bitcoin has fallen so some may have incurred losses too. Now is the time to book losses – these can be carried forward and set off against gains made from other assets next year.

Ashok Shah, chartered accountant and founding partner of N A Shah Associates LLP 

The proposed amendments would mean that crypto participants can only book losses before March 31, 2022, if they desire to set off such losses against other income. So, each participant will have to examine their own nature of income, and see if they have a need to use these losses in the current financial year. On the other hand, if they take the view that the particular crypto asset can not only recover losses, but also deliver strong gains, they may hold. But then from next financial year, they will have to pay 30 percent tax on gains from digital assets.

There is still a grey area on how the TDS rules will be implemented. For example, in whose favour will TDS be deducted and who would be the counter-party, the platform or the other crypto participant in the transaction. And will the TDS be higher if the counter-party does not have a PAN card or has not filed her return, and how will the buyer determine if the counter-party has filed the return or not.

Also read | Explained: How cryptocurrencies will be taxed after Budget 2022

Ankit Jain, partner at Ved Jain and Associates 

To discourage investors from actively take part in crypto-trading, the government has levied the highest rate of 30% tax plus surcharge and cess on the income from cryptocurrencies. While introducing this tax has provided some certainty of taxation, the fact that only cost of acquisition would be deductible has still left multiple challenges for the taxpayer. Further, the term cost of acquisition has also not been defined, adding to the confusion. Costs such as exchange fees, wallet charges, and so on are commonly incurred while trading in cryptocurrencies. These charges would not be deductible.

Government has also disallowed the loss from crypto-trading from being adjusted with any other income or being carried forward to the next year. This proposal will be a big discouragement to the investors or traders of cryptocurrency and might even lead to unnecessary volatility at year-end where such investors would try to square off their holdings to minimise their losses in a year.

The Finance Bill has introduced a TDS rate of 1% on the purchase of any cryptocurrency. The primary purpose of introducing this nominal rate seems to be to collate all the data in respect of the trading of cryptocurrency. However, implementing this provision is not as straightforward as it seems. This is going to be a hard step to implement on the crypto exchanges as the identity of buyer and seller is not readily available to each other. Determining this information and complying with these provisions timely in a volatile crypto environment is almost next to impossible.

Abhishek Soni, CEO and co-founder, Tax2win.in 

In addition to the 30% tax rate, the tax payer will also have to pay applicable cess and surcharge, as per their income-tax slabs. Tax will be levied on the transfer of the digital virtual asset. No deduction of expenses will be allowed, except the cost of acquisition. The Central Board of Direct Taxes (CBDT) will have to clarify on whether the loss arising from the transfer of one such virtual asset can be set off against the gain made from another.

The government has considered gains on digital virtual assets like a gain from a lottery win. This is not a capital gain. So there is no question of indexation benefit or any other such relaxation involved. Also you cannot carry forward the losses incurred while transacting in a digital virtual asset.

The proposed amendment of taxability on the transfer of digital virtual assets will be applicable from FY 2022-23. While transferring the digital virtual asset, the buyer is expected to deduct 1 percent of the consideration and deposit it as income tax in the name of the seller. This provision is applicable where the seller is a resident. It also means that the buyer has to ask for the Permanent Account Number (PAN) and other details of the seller. This may lead to some amount of KYC compliance and curb anonymous transactions. TDS at the rate of 1 percent will be imposed after a specified threshold limit on payments for the transfer of crypto assets.

The gift of the virtual digital asset is also to be taxed in the hands of the recipient.

Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP

The term "transfer" (mentioned by the finance minister in her Budget 2022 speech when she announced the tax on digital virtual assets) is defined in the Income Tax (IT) Act to include a sale, exchange or relinquishment of assets or the extinguishment of any rights therein.

While the definition of the term "transfer" in itself encompasses exchange transactions, the proposed TDS provisions also specifically envisage scenarios of barter or exchange where payment is partly or wholly in kind and there is no movement in cash. Therefore, an investor would suffer TDS even in a situation where one uses crypto to buy something or even when one trades one crypto for another.

Based on a verbatim reading of the crypto tax provisions (Section 115BBH), it appears that the restriction of setting off of losses arising from the transfer of virtual digital asset is only against income computed under any other provisions of the IT Act. Hence, there seems to be no restriction to set off losses arising from one class of virtual digital asset, say, Bitcoin against gains from another class, say, Ethereum within the same financial year. However, losses from transactions in virtual digital asset which have not been set off within the financial year, cannot be carried forward to the subsequent years. Also, it may not be possible to set off losses and expenses of crypto trading against other heads including speculative income.