By Sreenivasulu Reddy
Cryptocurrencies are digital or virtual currencies and most of them exist on decentralised networks (without any intermediary like banks or financial institutions). As they gain popularity, it brings along a requirement of tax implications that every investor should understand. With the rise of digital currencies, questions about how they are to be taxed, reported, etc., are increasingly important.
Taxability issues
Virtual Digital Assets (VDA) have been defined in a wide manner to include any information, code, number or token, (not being Indian or foreign currency), and generated through cryptographic means or others. Income from transfer (trading, selling) of VDA is subject to taxation at 30% (plus applicable surcharge & cess), irrespective of whether the income is treated as capital gains or business income. Also, no deductions for expenses relating to the transfer is allowed, except for expenses related to the cost of acquisition of the VDA.
The tax rate remains the same irrespective of the holding period. Gifting of digital assets attract tax in the hands of the receiver. For withholding, Section 194S provides for 1% Tax Deducted at Source (TDS) on sale consideration paid to a resident taxpayer if the amount paid/ credited exceeds Rs 50,000 (Rs 10,000 in certain cases) in a financial year.
Reporting
Income derived from VDAs can be broadly classified into three categories: Capital gains when held as investments, business or professional income when traded frequently, and income from other sources when received as gifts or exchanged informally.
The income tax return (ITR) forms include a specific section ‘Schedule VDA’ for reporting cryptocurrency gains or income. Here taxpayers are required to furnish detailed information for each transaction covering date of acquisition and transfer, head of income, cost of acquisition and consideration received.
One needs to choose the correct ITR form, basis their individual circumstances like ITR-2 in case of capital gains or ITR-3 for trading as business income.
Also, basis the fact pattern (like tax residential status, taxable income during the concerned financial year, etc.), one needs to evaluate the disclosures to be made in Assets & Liabilities Schedule and Foreign Assets Schedule in the ITR.
Loss from crypto transactions
As per Section 115BBH, loss from digital assets cannot be offset against any other income (not even income/ gains from other digital currency). So, every transfer should be treated as a separate transaction and reported in ITR. Also, the losses incurred (if any), cannot be carried forward to subsequent financial years for offset. So, a taxpayer cannot off set previous year losses from a crypto asset while filing ITR for the subsequent financial year.
Indian crypto investors are not permitted to claim any expenses related to their crypto activities, except for the acquisition cost or purchase cost.
The writer is tax partner, EY India. Inputs from Garima Agrawal, director, Tax, EY India.
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