Tax and investment expert Balwant Jain says that as per the budget memorandum, the total tax liability of an individual on investment in cryptocurrencies or other virtual digital assets will be the sum of the income arising from transfer or transaction of such assets.
Cryptocurrency Tax Calculation 2022: Budget 2022 has announced a 30% tax on income from transfers of Virtual Digital Assets (VDA), including cryptocurrencies and NFTs, which has been welcomed by the crypto community. Even though the tax is very high, crypto investors are still happy that it has at least received some recognition from the taxation on crypto. However, Finance Minister Nirmala Sitharaman has clarified that taxing VDA income, including crypto, does not mean that they have got legal recognition. There will be complete clarity on this when the bill regulating digital assets is brought. Many crypto investors are confused about the calculation of their tax liability. Here we have tried to clear the confusion of such people.
What do experts say
- Tax and investment expert Balwant Jain said, “As per the budget memorandum, the total tax liability of an individual on investment in cryptocurrencies or other VDAs will be the sum of the income arising from transfer or transaction of such assets.” Jain further said, “From the next financial year (FY 2022-23) a flat 30% tax will be applicable on gains from transfer or sale of digital assets including crypto and NFTs. Investors should also note that losses arising from cryptocurrencies cannot be set off or carry forward.”
- SR Patnaik, Partner and Head – Taxation, Cyril Amarchand Mangaldas said, “This means that if a taxpayer has earned any income from transfer of virtual digital assets, then he will have to pay tax at the rate of 30 per cent on that income. Income from other sources will not be included in the computation of tax on income from this source. This source cannot be clubbed with any other source of income.
- understand by example – Rishi Anand, Partal of DSK Legal has explained it with an example. He says, “Suppose the total taxable income of a taxpayer is Rs 1 lakh, out of which Rs 20,000 is income from VDA transfer. On this, tax of Rs 6 thousand will have to be paid at the rate of 30 percent, while tax of Rs 80 thousand will have to be paid according to the applicable slab rate.
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When will you have to pay 30 percent tax on income from virtual digital assets?
As per the budget document, the tax of 30% on cryptocurrencies and other VDA will be applicable from assessment year 2023-24. This means that in the financial year 2022-23, all your income from crypto transactions will be taxed at the rate of 30%. Jain said that as per the existing taxation rules, investors can pay tax on income from crypto and NFTs till the end of FY 2021-22.
Tax Calculations: Will there be a tax on both gains and losses of crypto?
- Loss due to transfer of crypto assets cannot be set-off or carried forward with any other income. Suresh Surana, Founder, RSM India said, “However, the loss arising from transfer of crypto assets can be set-off with the profit arising from transfer of crypto assets in the same financial year.”
- Giving example, Dr. Surana said“Suppose, the salary income of a person is Rs 20 lakh. He has made a profit of Rs 5 lakh on the sale of bitcoin and a loss of Rs 2 lakh on the sale of ethereum. He can set-off the loss and he will have to pay tax on the net profit of 3 lakh rupees from the sale of crypto (Bitcoin and Ethereum). Apart from this, applicable surcharge (nil in this case) and cess (1.2% viz 4% of 30% tax) will also have to be paid. In this way, that person will have to pay tax at the rate of 31.2% in aggregate. Salary income of Rs 20 lakhs will be taxed by the person in the normal slab of 5% to 30% (plus surcharge and cess) depending on whether the taxpayer has made any payment under section 115BAC of the Income Tax Act. Have opted for Optional Tax Regime.
- Professor Ankur Sinha, Associate Professor of Production and Quantitative Methods at IIM Ahmedabad said that only gains will be taxed, losses will not be taxed.
- Prof Sinha further said, “However, any loss arising on account of investment in this asset class cannot be set-off against income from any other source. Simply put, if you make a loss of X by investing in crypto and a gain of Y elsewhere, you cannot claim that you will pay tax on YX. On the other hand, if you get profit X from investing in crypto and get profit of Y elsewhere, then you will have to pay tax on both X and Y.”
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Will crypto income be taxed more than 30%?
More clarity is needed from the government in this regard. Experts differ on whether the crypto investor will have to pay only 30% tax or pay more on account of surcharge. The tax paid on income from transfer of cryptocurrencies, NFTs or other virtual digital assets can be more than 30% as this flat rate is excluding applicable surcharges and cess. As seen in an example above, the effective tax on income from crypto transactions can be as high as 30%.
- Surana says, “Taxation of income from cryptocurrency assets includes 30 per cent tax as well as surcharge and cess. Surcharge is applicable at the rate of 10%, 15%, 25% and 37% of the tax amount depending on the taxable income and cess at the rate of 4% of the tax and surcharge amount. Thus, income from transfer of crypto assets may attract tax of 31.2%, 34.32%, 35.88%, 39% and 42.744% depending on the taxable income in case of Individual/HUF.”
- However, Patnaik believes that the actual tax to be paid on the income from crypto will not exceed 30%.
- Patnaik explained this with an example saying, “Suppose Mr. X invests US$ 100,000 in cryptocurrency and receives 10,000 units. He decides to sell them in 5 installments of 2,000 units each and gets 15,000 US$, 25,000 US$, 40,000 US$, 75,000 US$ and 5,000 US$ from it. Thus, on an investment of US$ 100,000, Mr. X received a total of US$ 160,000. Therefore, he has to pay tax at the rate of 30% on net income of US$ 60,000 i.e. US$ 18,000 (30% of US$ 60,000). It will be clubbed with their other income and they will have to pay tax along with applicable surcharge and education cess on their total income.”
Will airdropped crypto tokens or NFTs also be taxed?
EarthID’s VP – Research & Strategy, Sarat Chandra explained that not only crypto investors, but those who have received airdropped crypto tokens or NFTs as gifts, will also have to pay taxes.
Do you have to pay tax to hold crypto?
You will have to pay tax only if you receive income from transactions, transfers or exchanges or crypto assets. According to experts, there is no tax to be paid for holding crypto.
(Article: Rajeev Kumar)
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