1. Introduction

Bitcoin was the first cryptocurrency to hit the market in 2009, and it was invented by a person or group using the alias Satoshi Nakamoto. After that, several Cryptocurrencies were launched, and some of the popular currencies are Bitcoin Cash, Ripple (XRP), Litecoin, etc. As per an estimate, more than 8,000 cryptocurrencies exist as of January 2022.

India’s cryptocurrency market has seen exponential growth over the past few years. It is expected that the investment by Indians in Cryptocurrency could touch $ 241 million by 2030. Currently, India has the highest number of crypto owners globally.

Currently, no legislation governs, regulates, or prohibits dealing in cryptocurrencies in India. Therefore, it is not illegal to sell, purchase, deal or mine cryptocurrencies or set up any cryptocurrency exchange in India.

Now in the Union Budget 2022 the Govt. has cleared its stand that it is not going to prohibit Indians from dealing in cryptocurrencies but to regulate it. These provisions are applicable from the assessment year 2023-24. Thus, any transfer of a virtual digital assets on or after 01-04-2022 shall be taxable as per new provisions proposed by the Finance Bill, 2022.

2. Meaning of Virtual Digital Asset

A new clause (47A) has been inserted in Section 2 to provide an exclusive meaning of Virtual Digital Asset. (extract of sections is given in below section)

In simple words, the virtual digital asset shall mean a cryptocurrency, NFT or another virtual digital asset as notified by the Central Govt. It will not cover subscriptions to any OTT platform, mobile applications, e-commerce platforms, etc.

3. Classification of Virtual Digital Asset

The Govt. did not clarify if the virtual digital assets will be a currency, commodity, or security. In the absence of any such clarification, the virtual digital asset should be classified as a capital asset or business income.

As per the standard income tax rules, the gains on the crypto- transactions would become taxable as (i) Business income or (ii) Capital gains. This classification will depend on the investors’ intention and nature of these transactions.

If there are frequent trades and high volumes, gains from the cryptocurrency transactions will be taxed as ‘business income’.

However, they will be taxed as ‘capital gains’ if the purpose of owning them is primarily to benefit from longer-term appreciation in value with fewer trades.

4. Taxation under the Head Capital Gains [Section 115BBH]

4.1 Nature of Virtual Digital Assets

If gains arising from the transfer of virtual digital assets are treated as capital gains, their further classification into short-term or long-term gains would depend upon the period of holding of such assets.

If a virtual asset is held for more than 36 months from the date of purchase, it will be considered a long-term capital asset; otherwise a short-term capital asset.

4.2 Computation of capital gains

The capital gains from the sale of virtual digital assets shall be computed in the following manner:

4.2 A: No deduction to be allowed for any expenditure or allowance

While computing the short-term or long-term capital gains, except the cost of acquisition, no other deduction or exemption shall be allowed. Thus, the following items shall be ignored while computing the capital gains from the transfer of virtual digital assets:

   (a)  Expenditure incurred in connection with the transfer of a virtual digital asset;

   (b)  Cost of improvement relating to a virtual digital asset;

   (c)  Indexation of cost of acquisition of a virtual digital asset;

   (d)  Exemption under Section 54F.

    (e) Chapter VI deduction

However, relief under Section 87A can be claimed.

4.2 B: Tax rates on capital gains is 30%

The income arising from the transfer of virtual digital assets shall be taxed at the rate of 30%. Thus, short-term and long-term capital gains both shall be taxed at a flat rate of 30%.

5. Taxation under the Head Business Income

If the transactions in virtual digital assets are substantial and frequent, it should be held that the taxpayer is trading in such assets. In this case, income from the sale of such assets should be taxable as business income. The gains (without deduction of any expense or allowance) shall be taxable at the flat rate of 30% plus surcharge and cess.

6. Taxation under the Head of other Sources [Section 56(2)(x)]

6.1 Scope of Section 56(2)(x)

Section 56(2)(x) applies when any person receives any benefit whose value exceeds Rs. 50,000. This provision is applicable notwithstanding the residential status or class of assessee. The donor or donee can be an individual, partnership firm, LLP, company, AOP, BOI, co-operative society or artificial juridical person, whether resident or non-resident.

The deemed income under this provision arises from the following transactions:

   (a)  Receiving monetary benefits without consideration;

   (b)  Receiving immovable property without consideration or for inadequate consideration; and

   (c)  Receiving specified movable properties without consideration or for inadequate consideration.

6.2 Benefit arising from movable property

The deemed income under this provision can arise from the following transactions:

(a)  Where any property is received without consideration and the aggregate fair market value of which exceeds Rs. 50,000, the whole of the aggregate fair market value of such property will be chargeable to tax.

(b)  Where any property is received for a consideration that is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000, the difference between fair market value and consideration is chargeable to tax.

In both the situations, the limit of Rs. 50,000 shall be checked for every transaction and not in aggregate of all transactions.

This provision is applicable to any property in the nature of shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art, or bullion. Where the transaction involves any other movable property, excess of consideration over the fair market value shall not be chargeable to tax.

The Finance Bill, 2022 proposes to include virtual digital assets within the scope of movable assets. Thus, after the amendment, Section 56(2)(x) shall apply to the following properties:

   (a)  Shares and securities;

   (b)  Jewellery;

   (c)  Archaeological collections;

   (d)  Drawings;

   (e)  Paintings;

   (f)   Sculptures;

   (g)  Any work of art;

   (h)  Bullion; and

   (i)   Virtual Digital Assets.

Thus, if a person receives a virtual digital asset without consideration (gift) or for inadequate consideration and the value of such benefit exceeds Rs. 50,000, it shall be taxable in the hands of the recipient under Section 56(2)(x) as income from other sources.

6.3 Determination of fair market value of virtual digital assets

The fair market value of the virtual digital asset for taxability under Section 56(2)(x) shall be determined in accordance with Rule 11UA.

6.3 A: If purchased from registered dealer

In case the virtual digital assets are purchased on the valuation date from a registered dealer, the invoice value of such asset shall be its fair market value.

6.3 B: If received in other mode

In case the virtual digital assets are received by any other mode (i.e., mining, etc.) the fair market value of such asset shall be estimated to be the price that it would fetch if sold in the open market on the valuation date. If the value of such asset exceeds Rs. 50,000, then the assessee may obtain the report of the registered valuer in respect of the price it would fetch if sold in the open market on the valuation date.

6.4  Tax rates

The value of the benefit arising under this provision shall be taxed at the rate applicable to the assessee. Such income shall not be taxed at 30% under Section 115BBH because it does not arise due to the transfer of a virtual digital asset. However, when the recipient further transfers such assets, the resultant gains shall be taxable under Section 115BBH.

7. Treatment of Losses

7.1 General rules of set-off and carry forward

Income-tax is charged on the total income of an assessee. Therefore, income is computed head-wise to determine the total income. Income-tax Act contains certain provisions which do not allow to set-off certain losses but allow some of them in a particular manner and thus make the aggregation a legal concept. Losses incurred in the relevant year are adjusted against another income in three steps – Intra-head Adjustment, Inter-head Adjustment, and Carry forward of losses.

If several sources of income fall under the same head of income, the loss from one source of income may be set-off against the income from another source falling under the same head of income. This is called intra-head adjustment of losses.

If after setting-off the loss from one source against the income of another source falling under the same head, the net result is still a loss, the loss under one head of income may be set-off against the income under another head in the same previous year. This is called as inter-head adjustment of losses.

Where a loss cannot be completely set-off against income under the same head (intra-head adjustment) and against income under another head (inter-head adjustment), then the losses remaining shall be carried forward to next year.

7.2 No set-off and carry forward allowed to losses from virtual digital assets

Section 115BBH(2)(b) provides that no set-off of loss from the transfer of the virtual digital asset computed shall be allowed against income computed under any other provision of this Act to the assessee, and such loss shall not be allowed to be carried forward to succeeding assessment years.

It is clear that the capital losses from the transfer of virtual digital assets cannot be set-off against any other capital gains subject to the rules of intra-head and inter-head adjustment. In other words, the short-term capital loss from the sale of a cryptocurrency cannot be set-off against the short-term capital gains from the sale of listed shares. Similarly, the long-term capital loss from the sale of NFTs cannot be set-off against the long-term capital gains from the sale of mutual funds.

However, the losses from one virtual digital asset should be allowed to be set-off from the gains from another virtual digital asset. Section 115BBH(2)(b) prohibits set-off the losses from virtual digital assets as computed under Section 115BBH(1)(a) against income computed under any other provision of this Act. As capital gains from the transfer of any other assets are computed and taxed under other provisions, while as the income from sale of all virtual assets are computed under Section 115BBH, such set-off of loss from one virtual asset against income from another virtual asset shall be allowed. Such set-off shall be subjected to the existing rules of intra-head and inter-head adjustment.

For example, short-term capital loss arising from the transfer of Ethrum (cryptocurrency) can be set-off against short-term capital gains arising from the transfer of bitcoin or an NFT.

8. Illustrations

Example 1: Mr. A has purchased 60,000 USDT (cryptocurrency) at Rs. 67 each on 16 July 2018. He transferred 20,000 USDT in the previous year 2021-22, and the remaining 40,000 in 2022-23. The capital gains from the transfer of USDT shall be computed as under:

Example 2: Mr. A has purchased 2,000 NFTs at Rs. 1,000 each on 16 July 2020. He transferred all NFTs in the previous year 2022-23. The capital gains from the transfer of NFTs shall be computed as under:

Example 3: Mr. A has purchased 1,000 NFTs and 1,000 Cryptocurrency at Rs. 1,500 each on 16 July 2020. He transferred all NFTs and Cryptocurrency in the previous year 2022-23. The capital gains from such transfer shall be computed as under:

Sources

https://cleartax.in/s/cryptocurrency-taxation-guide

https://www.taxmann.com/post/blog/taxation-of-virtual-digital-asset/#Taxation-under-the-Head-Business-Income