On February 1, 2022, India’s Finance Minister, Nirmala Sitharaman, made a surprise announcement: India will now levy a 30% tax on cryptocurrency transactions. The announcement followed months of speculation on the Indian government’s stance towards cryptos after it had previously released warnings against them.
Reactions to the news were understandably mixed, ranging from support to outrage.
But what actually happens when you buy, sell or use cryptocurrencies in India? Will the tax affect you? What else is there to know about using cryptos in India? Many questions are popping into the minds of investors.
Excerpt from the budget shows:
The Union Budget, presented by the Finance Minister, is a comprehensive overview of India’s economic situation.
- Flat 30% tax on all virtual digital assets
- Virtual digital assets include NFTs as well crypto
- The tax liability of a recipient who receives a gift of a virtual digital asset is also applicable.
- 1% Tax deduction at source on all transactions in digital assets
- Launch of digital currency by Reserve bank of India in 2023
- Any crypto/NFT sale loss can not be set off or carried forward against profits in the following years.
The Union Budget was presented amidst growing debates on the necessity of a legal framework for cryptocurrencies. The Indian government has clearly chosen to tax cryptos instead of legalizing them, possibly due to the concern that legalization would open up India’s markets for other countries’ cryptocurrencies and spyware-based surveillance by foreign entities.
The overarching message is clear: Once launched, RBI’s cryptocurrency would be subjected to the same laws as Bitcoin and other cryptos. This implies that transactions made using RBI’s cryptocurrency could also be taxed under this new policy.
How will these provisions affect you?
Here are some pointers:
1) You can’t set off your losses against profits anymore!
You might have come across posts about people who bought bitcoin at its all-time high in December 2017 and lost money. Now, you can’t set off your loss against profits in the same financial year when cryptocurrencies are taxed at a flat 30%. Thus, if you pay taxes according to your income tax slab – you will have to part with an additional 30%, one of the highest levies on capital gains by any country in the world!
2) Cryptocurrencies are now treated like commodities
It has been announced that for taxation purposes, RBI’s cryptocurrency will be treated like gold or stock shares. This means that all crypto transactions–including mining, trading or exchange through fiat currencies (INR), will be taxable under the new provisions. The government has also introduced a provision to levy a 1% tax deduction at source on all transactions involving cryptocurrencies.
3) A mechanism for identifying cryptocurrency investors is on the anvil!
Taxpayers will be required to disclose their Permanent Account Number (PAN), an identity number issued by the Income Tax Department, at the time of creating accounts with crypto exchanges. This might cause problems for people who use Bitcoin addresses as their PAN numbers due to a lack of awareness about how exchanging cryptos will require them to share their identities.
4) Virtual Digital Assets have been defined as property
The finance minister has announced that virtual digital assets, such as NFTs, will be treated as “intangible property” hence attracting tax at 30%. This move is motivated by the need to make cryptos accountable and taxable. By forcing cryptos to adopt strict Know Your Customer (KYC) and Anti-Money Laundering (AML) policies, the government of India is laying down a framework for cryptocurrencies.
5) RBI’s cryptocurrency could be a digital currency soon!
The Indian government has announced, in the budget speech, that it plans to launch a “digital rupee” backed by the RBI. This move is motivated to make cryptocurrencies accountable and taxable. While no formal announcement was made about bitcoin or other cryptos not being legal tender any more, the fact that RBI’s cryptocurrency would be released shows that investors are still expected to use their fiat currencies for retail transactions.
What do you think of these new rules? Let us know in the comments below.