FAQs: Taxation and TDS rules for cryptocurrencies and virtual digital assets

Cryptocurrencies have always been in news. Earlier it was due to abnormal returns generated and recently for the abnormal losses in this asset class. It has also been in news for new tax and TDS rules introduced by the recent budget. Let us try to understand how cryptocurrencies used to be taxed and what has changed after coming into force of new rules.

There were no specific provisions for taxation of cryptocurrencies prior to the specific rules introduced in the budget 2022. However, applying the general provisions, for all the transaction of sale executed till 31st March, 2022 the profits would be taxed as capital gains if the assets were held as investment. The profits were to be treated as long term capital gains if cryptocurrency was sold after holding for 36 months or more and flat rate of 20% after indexation would apply. The profits were treated as short term capital gains if the cryptocurrency was sold within 36 months, like your regular income, and were taxed at your slab rate. For those who traded in cryptocurrencies, the profits were taxed as business income after allowing all the expenses incurred in the course of carrying on the business.

After introduction of specific provisions from 1st April 2022 a flat tax @ 30% is applicable on the profits whether the cryptocurrencies are held as investment or as business asset. The tax rate would be the same irrespective of your holding period. Moreover, no expenditure is allowed against the sale value except cost of its acquisition. So even if you are trading in these assets you will not be allowed to claim your establishment expenses against your profits on such assets.

As per new rules loss from one cryptocurrency is not allowed to be set off against profits from another even during the same year. Moreover, even loss incurred during the year is not allowed to be carried forward for set off against profits in these assets in subsequent years.

The budget 2022 also introduced provision for deduction of tax at source on transactions of cryptocurrencies. Though the provisions for taxation of cryptocurrencies have come into effect from 1st April 2022 the TDS provisions have come later into effect from 1st July 2022.

Under the newly introduced TDS provisions the buyer is required to deduct tax while crediting or making payment for purchases of cryptocurrencies @ 1% of the transaction amount. The TDS is applicable whether you have earned profits or not on your transactions.

Yes, you have to deduct tax at source while making payments for purchase of these assets provided the aggregate value of all the transactions during the exceeds specified limits with the same person. The specified applicable limit is Rs 50,000/- for those individual and HUF who are engaged in business or profession and their turnover/receipt did not exceed Rs 1 crore and 50 lakhs respectively in the previous year. Even this limit applies for those who are not engaged in any business or profession. For person not covered in the above the limit is Rs 10,000/- per year in aggregate of all the transactions beyond which you have to deduct tax at source. So all the companies, partnership firms and LLP will have to deduct tax once the value of Rs 10,000/- is crossed with the buyer in a year. Tax at higher rates will apply in case the seller does not furnish his PAN or has not filed his ITR for past year and the tax deducted/collected at source exceeded fifty thousand in that year.

These TDS provisions are applicable only when the payment is being made to a resident. In case the payment is being made to a non-resident the existing provisions of Section 195 will apply and which have been there in law book for many years.

The tax rate on profits on cryptocurrencies is 30% whereas the TDS rate is only 1% which makes it amply clear that the intention of introducing TDS provisions is not to collect full tax on profits but to bring all such transactions into tax network because the TDS amount will reflect in the AIS/26AS of the buyer ensuring that no transaction escapes the tax net specially looking at the small threshold limit where tax is not required to be deducted.

(Balwant Jain is a tax and investment expert. He can be reached on jainbalwant@gmail.com and and @jainbalwant on twitter.)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.timesnownews.com.)