New Scheme for Taxation of Virtual Digital Assets or Cryptocurrencies

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  • By Taxmann
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  • Last Updated on 7 April, 2022

Table of Content

  1. What is virtual digital asset
  2. Tax on income from virtual digital asset

Taxation of Virtual Digital Assets; Cryptocurrencies

Income arising from transfer of virtual digital asset will be taxable from the assessment year 2023-24 onwards. Any profit generated on transfer of a virtual digital asset on or after April 1, 2022 will be chargeable to tax according to the provisions which are given below –

1. What is virtual digital asset

Clause (47A) has been inserted in section 2 to define “virtual digital asset”. By virtue of the exclusive definition, “virtual digital asset” means –

    1. any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means (or otherwise), providing a digital representation of value exchanged with (or without) consideration, with the promise (or representation) of having inherent value (or functions as a store of value) or a unit of account including its use in any financial transaction (or investment), but not limited to investment scheme; and can be transferred, stored or traded electronically;
    2. a non-fungible token (or any other token of similar nature);
    3. any other digital asset, as notified by the Central Government.

Other points – The following points should be noted –

    1. The Central Government may (by notification in the Official Gazette) exclude any digital asset from the definition of virtual digital asset (subject to such conditions as may be specified).
    2. “Non-fungible token” means such digital asset as notified by the Central Government.
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2. Tax on income from virtual digital asset

Section 115BBH has been inserted to tax income arising from transfer of virtual digital asset. The provisions of section 115BBH (given below) are applicable notwithstanding anything contained in any other provision of the Act.

Nature of income – Nothing is clear from the scheme of section 115BBH whether it is business income or capital gains or income from other sources. Under section 2(14), a capital asset means property of any kind of an assessee whether or not connected with his business. Cryptocurrencies or NETs may be deemed as capital assets, if acquired by a person for the purpose of investment. In such a case, any gain arising on the transfer of such assets shall be taxable under the head “Capital gains”. If, however, such transactions are substantial and/or if such assets are held for trading purposes, income from sale/purchase of virtual digital assets may be taxed as business income.

Tax rate – By virtue of section 115BBH, income from transfer of virtual digital asset will be taxable at the rate of 30 per cent (+ SC + HEC). Tax rate is the same whether it is business income or short-term capital gains or long-term capital gains.

How to compute income  Section 115BBH(2)(a) provides that no deduction in respect of any expenditure (other than cost of acquisition, if any) or allowance or set off of any loss shall be allowed to the assessee under any provision in computing the income arising from transfer of virtual digital asset. To put it differently, –

    1. Cost of acquisition, if any, will be deducted from the full value of consideration. If income is taxable under the head “Capital gains”, indexation benefit will not be available.
    2. No deduction will be allowed pertaining to cost of improvement, expenditure on transfer, etc.
    3. The definition of “transfer” under section 2(47) shall apply for the purpose of computation of tax under section 115BBH pertaining to income from transfer of any virtual digital asset (whether capital asset or not).
    4. Loss arising on transfer of virtual digital asset cannot be adjusted against any other income.
    5. Any loss incurred by an assessee (from any transaction) cannot be adjusted against income from transfer of virtual digital asset.

Tax deduction at source – Section 194S has been inserted with effect from July 1, 2022 for the purpose of tax deduction at source by a person who is responsible for paying to a resident any sum by way of consideration for transfer of virtual digital asset. See para R2.50 for detailed discussion.

Illustration: X (54 years) is a salaried employee (annual taxable salary being Rs. 46,00,000). He purchases and transfers the following cryptocurrency (as an investor) –

Purchase Transfer
Date Quantity Rate (in INR) Date Quantity Rate (in INR) Expenditure on transfer (in INR)
May 1, 2018 2,40,000 USDT 60 November 1, 2021 70,000 USDT 65 5,000
March 1, 2022 30,000 USDT 80 3,000
June 1, 2022 1,40,000 USDT 66 10,000
April 1, 2022 800 NFTs 1,400 July 17, 2022 600 NFTs 1,300 4,000

X annually contributes Rs. 1,50,000 towards recognised/public provident fund. Apart from the information given above, he has the following additional income –

    • Long-term capital loss of Rs. 1,02,000 on transfer of a residential house property on March 31, 2022.
    • Business loss of the previous year 2022-23 from a new part-time business of trading in computer hardware : Rs. 9,07,130.

X wants to know tax implications pertaining to the previous years 2021-22 and 2022-23.

Solution:

Rs. Rs.
Previous year 2021-22 (assessment year 2022-23) 
Salary 46,00,000
Capital gain on transfer of 70,000 USDT –
Full value of consideration (70,000 USDT × Rs. 65) 45,50,000
Less: Expenditure on transfer 5,000
Less: Indexed cost of acquisition (70,000 USDT × Rs. 60 × 317 ÷ 280) 47,55,000
Long-term capital loss (-) 2,10,000
Capital gain on transfer of 30,000 USDT –
Full value of consideration (30,000 USDT × Rs. 80) 24,00,000
Less: Expenditure on transfer 3,000
Less: Indexed cost of acquisition (30,000 USDT × Rs. 60 × 317 ÷ 280) 20,37,857
Long-term capital gain 3,59,143
Long-term capital loss on transfer of house property (-) 1,02,000
Income under the head “Capital gains” (Rs. 3,59,143 – Rs. 2,10,000 – Rs. 1,02,000) 47,143
Gross total income 46,47,143
Less: Deduction under section 80C 1,50,000
Net income (rounded off) 44,97,140
Tax on net income
Income-tax (20% of Rs. 47,140 + normal tax on balance) 11,56,929
Add: Health and education cess 46,277
Tax liability (rounded off) 12,03,210
Previous year 2022-23 (assessment year 2023-24) 
Salary 46,00,000
Business loss (-) 9,07,130
Capital gain on transfer of 1,40,000 USDT –
Full value of consideration (1,40,000 USDT × Rs. 66) 92,40,000
Less: Expenditure on transfer (not deductible) Nil 
Less: Cost of acquisition (1,40,000 USDT × Rs. 60) (indexation benefit not available) 84,00,000
Long-term capital gain 8,40,000
Capital gain on transfer of 600 NFTs –
Full value of consideration (600 NFTs × Rs. 1,300) 7,80,000
Less: Expenditure on transfer (not deductible) Nil 
Less: Cost of acquisition (600 NFTs × Rs. 1,400) (indexation benefit not available) 8,40,000
Long-term capital loss (-) 60,000
Income under the head “Capital gains” (loss from transfer of virtual digital asset cannot be adjusted against capital gain on transfer of virtual digital asset, even carry forward of such loss is not possible) 8,40,000
Gross total income [see Note] 54,40,000
Less: Deduction under section 80C 1,50,000
Net income 52,90,000
Tax on net income
Income-tax (30% of Rs. 8,40,000 under section 115BBH + normal tax on balance) 13,99,500
Add: Surcharge 1,39,950
Tax and surcharge 15,39,450
Add: Health and education cess 61,578
Tax liability (rounded off) 16,01,030

Note– Business loss cannot be adjusted against salary income. Generally, business loss can be adjusted against income under the head “Capital gains”. However, by virtue of section 115BBH, business loss (or any other loss) cannot be adjusted against income arising from transfer of virtual digital asset. Unadjusted business loss of Rs. 9,07,130 can be carried forward and in subsequently year/years, it can be adjusted against business income (but not income arising from transfer of virtual digital asset).

Dive Deeper:
Understand the Taxation of Virtual Digital Asset

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