Tax Academi

Taxation on Digital Assets

The Indian government has Fastened regulations on Virtual Digital Assets like cryptocurrency, Bitcoin or Ethereum, etc…. A tax of 30% is levied on any income from the transfer of virtual assets. The new tax provisions came into effect on April 01, 2022. As a result, the blockchain industry has received conflicting reviews and tremendous responses.

Virtual digital assets include crypto assets such as bitcoin and Ethereum, as well as NFTs.

A 30% tax will be applied on income produced by the transfer of virtual digital assets.

TDS of 1% will be deducted from such transfers.

Infrastructure expenditures for mining virtual digital assets are not included in the acquisition cost, and hence cannot be deducted from earnings..

Only losses from one virtual digital asset can be offset against gains from another virtual digital asset if they occur during the same fiscal year.

Losses resulting from a transaction are not carried forward.

Crypto trading losses cannot be mitigated by other sources of revenue.

Vijay buys Ethereum worth Rs 2 lakh on July 1, 2022. The value of Ethereum drops to Rs 1,00,000 on August 1.

  • he withdraw Ethereum on August 1, booking a loss of Rs 1,00,000, because he don’t expect it to recover soon and wanted to cut his losses.
  • Instead of Rs 1,00,000, he gets back Rs 99,000 after 1 percent tax is deducted at the source. It doesn’t matter whether you make a profit or loss – TDS will be deducted at the time of redemption.
  • he now invest this Rs 99,000 in Bitcoin on August 1.
  • Bitcoin does well and it’s valued at Rs 1,30,000 on March 1, 2023. Vijay sells and books profit. Again, he gets back Rs 1,28,700, because of TDS.

So, as of March 1, he doesn’t have any crypto holdings.

In FY23, here is what Vijay had done with His crypto investments:

  • Booked a loss of Rs 1,00,000 on Ethereum and paid Rs 1,000 as TDS.
  • Made a profit of Rs 31,000 on Bitcoin and paid Rs 1,300 as TDS.
  • In total, Vijay made a loss of Rs 69,000 (-1,00,000 + 31,000)
  • And he paid Rs 2,300 (1000 + 1300) in taxes through TDS.

Since Vijay made an overall loss in crypto investments, He isn’t supposed to pay tax. While filing tax returns for 2022-23, you will show that you booked a loss of Rs 69,000 and hence, TDS of Rs 2,300 will be refunded to you.

Now, the success of Bitcoin has taken his mind, and decided to try his luck again on cryptocurrencies in the next financial year.

  • Vijay buys Bitcoin worth Rs 1 lakh on April 1, 2023. On March 1, 2024, it’s valued at Rs 1.8 lakh. He decided to sell it and book the profit.
  • As He has guessed already, Vijay will receive Rs 1,78,200 in your account after TDS of Rs 1,800. Now, when Vijay files his ITR for 2023-24, He needs to calculate tax liability for crypto investments.
  • Profit of Rs 80,000 minus loss of Rs 69,000 booked last year, which is Rs. 11,000.He estimate paying 30 percent of Rs 11,000 i.e Rs 3,300, in taxes.
  • However, the government doesn’t agree and says losses from virtual digital asset transactions can’t be carried forward. The benefit is available for businesses, mutual funds, and stocks but not for virtual digital assets.

For FY24, you must pay 30 percent tax on Rs 80,000, which is Rs 24,000. Since Rs 1,800 was already deducted, you need to pay Rs 22,200.

This is why the phrase “Your profit is our profit, your loss is your loss” is used to describe crypto taxes In General

Further, the government won’t allow other costs like platform fees, broker fees and internet charges to be deducted as expenses from the profit, except the cost of acquisition, which is the purchase price.

i.e Deductions will not be available for the purchase of such assets (other than the acquisition cost).

In general, the government has not legalised or outlawed cryptocurrencies..

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