Crypto loses ‘high’ as India tax rate brings equity in focus

Kumar Shankar Roy |BL Research Bureau | Updated on: Feb 01, 2022

(FILES) In this file photo taken on October 20, 2021 physical imitations of Bitcoins are pictured at a cryptocurrency exchange branch near the Grand Bazaar in Istanbul. - Bitcoin saw its price plunge in early 2022 in the wake of major tech groups, challenging the idea that cryptocurrency is some sort of inflation-proof digital gold championed by some of its proponents. (Photo by Ozan KOSE / AFP) | Photo Credit: OZAN KOSE

It is a bittersweet moment for the estimated 10 crore+ Indians that own cryptos. With the Finance Minister announcing a taxation regime for virtual digital assets in the Union Budget, crypto assets and non-fungible tokens (NFTs) are no longer outcasts, but this deemed recognition comes at an exorbitant price which is almost Shylock-esque! No wonder, the stock market appears more elated than the crypto market, who are compelled to swallow this bitter pill with a smile on their faces.

First, the tax rate for crypto is 30%, which puts it in the company of speculative activities lotteries, horse races, card games, gambling etc. This will be effective 1st April, 2023 ie for income earned from April 1, 2022- March 31, 2023. If you add surcharge and cess, effective tax rate for cryptos can be 34% to 42.7%. In comparison, you pay a much lower tax rate in equities and the long-term capital gain tax of 10% is applicable only after your profit for a year tops Rs 1 lakh. The high rates of crypto taxes could eventually lead to more and more millennials, who have been early adopters of cryptos, to come into the equity fold.

Second, there will be no deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss to the assessee under any provision of the Act while computing income from transfer of such virtual digital assets. So, crypto investors lose. In comparison, there are deductions allowed for certain other investment incomes. For instance the amount paid as interest on any monies borrowed to invest in the shares or mutual funds is allowable as a deduction. The interest deduction is limited to 20 per cent of the gross dividend income received.

Three, for cryptos and NFTs investors, no set off of any loss arising from transfer of virtual digital asset will be allowed against any income computed under any other provision of the Income Tax Act. Also, such loss shall not be allowed to be carried forward to subsequent assessment years. In case of equities, there are norms that allow set off and carry forwarding of capital losses, which is a boon for many investors.

Four, in order to capture the transaction details, there is TDS on payment made in relation to transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold (Rs 10,000-50,000 per fiscal). Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient, which closes yet another way for existing crypto investors to escape tax. TDS norms for virtual digital assets will take effect from 1st of July, 2022.

Five, there seems to be some confusion in what will happen to transactions that people execute in the interim period before the implementation dates. If crypto investors want to get out and avoid high tax rates, there could be an avalanche of supply and this could further impact cryptocurrencies such as Bitcoin etc. which is still down $30,000 from the peak of $68,000 hit in Nov-2021.

Published on February 01, 2022
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