The last few years have seen an increase in the popularity of cryptocurrency. Digital applications and other types of portals offering crypto trading have also risen in number, leading to more accessibility for investors to try their hands. Keeping this growth in mind, the finance ministry of India, in the Union Budget of 2022, mentioned the concept of ‘virtual digital assets’ and declared certain taxation proposals. So, whether you are paying advance tax or tax in a lump sum, your cryptocurrency transfers would incur a 30% tax. This has led to a mixed reaction from crypto experts. While some are relieved that the taxation of cryptocurrency could mean possible legalisation of it in the future, others are of the belief that the high tax rate could put people off crypto trading.

What does the government mean by ‘virtual digital assets’? 

The Finance minister of India, Nirmala Sitharaman, did not mention the word ‘cryptocurrency’ at all in her Budget 2022 speech. Instead, the umbrella term ‘virtual digital assets’ was used. What are they? The term was defined as including “any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value which is 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 and includes its use in any financial transaction or investment, but not limited to, investment schemes, and can be transferred, stored, or traded electronically”.

Cryptocurrencies and other digital assets such as NFTs (Non-Fungible Tokens) come under this definition.

Transfer and sale of cryptocurrency to attract tax 

The major point that has attracted attention is the 30%tax on the income generated from the transfer of cryptocurrency. The gains that a crypto investor receives on exchanging their share of a cryptocurrency with another investor would be subjected to this form of taxation. So, the next time you are using the income tax calculator to estimate your tax liability for the year, do remember to add the income generated from these virtual digital assets.

The usage of the term ‘transfer’ has been seen as slightly ambiguous by certain experts. For instance, some investors are wondering whether a transfer of cryptocurrency from one wallet to another crypto wallet of theirs would incur taxation as well. Experts opine that it would not likely be taxed.

The sale of cryptocurrency would also be eligible for taxation in a similar manner. When compared to the exchange of one digital asset with another, a sale of a digital asset includes regular money. An income tax calculator can help you understand how much tax you are liable to pay in this scenario.

Taxation on the gifting of cryptocurrency 

If you are gifting cryptocurrency to an individual who does not come under the legal definition of relatives, then the recipient would have to incur a 30% tax on the gift. Transfer or gifting of cryptocurrency to your spouse, child, or close relative would not incur these taxes. Note that for this taxation to be valid, the value of the cryptocurrency should be over Rs 50,000. One can manage their tax payment better by opting to pay advance tax during the financial year rather than pay it in a lump sum at the end of it.

While exact guidelines are yet to be provided, the taxation has led to many being hopeful about the regulation of crypto trading.

No set-off on the transfer of cryptocurrency & TDS

If you are transferring cryptocurrency and incurring losses for the same, then the loss cannot be set off againsto ther gains. You are not allowed to take the losses forward to the next financial year. A TDS of 1%on payments of over Rs 10,000 made for the transfer of cryptocurrency has also been introduced to keep a tab on the buying and selling of virtual digital assets.

If you are a first-time taxpayer, do remember to fill out and submit the right ITR form. There are around seven types of ITR forms available. Ensure to go through the details of each one and select the right form for yourself. It is also advisable to consult a financial and tax expert before making any major financial decisions.