From UPSC perspective, the following things are important :
Prelims level : Taxing of Crypto assets
Mains level : Cryptocurrencies regulation in India
The government has clarified that investors won’t be allowed to offset losses in one crypto asset against gains in another, and that crypto mining infrastructure costs will not be included in the cost of acquisition to be claimed as a deduction.
How are crypto investments taxed?
- The Union Budget 2022-23 in February proposed that gains from virtual digital assets or crypto assets would be taxed at 30% irrespective of the individual’s income tax slab.
- In addition, a 1% tax deducted at source or TDS was introduced on the transfer of such assets.
- The government did not say if crypto assets are to be treated as currency, commodity, or security, and a clarification is expected in due course via separate legislation.
- Gifting of crypto assets to non-relatives is also taxed in the hands of the recipient if the value exceeds ₹50,000 in a year.
How does crypto tax differ from others?
- If listed shares are sold within 12 months of purchase, short-term capital gains (STCG) tax is applied on the gains, while beyond one year, long-term capital gains (LTCG) tax is levied.
- STCG is levied at 15.6%, including cess, while LTCG for gains over ₹1 lakh is 10.4%, including cess.
- There is no provision of long-term or short-term crypto assets, while gains are taxed at a flat rate of 30%.
- Investors in equities can offset the loss in one stock against another, while they can carry forward both short-term and long-term loss for eight assessment years.
- This has not been allowed in crypto.
How will crypto tax impact investors?
- In a fiscal year, if an investor had made gains in bitcoin and losses in ether, he or she will have to pay tax at 30% on gains in bitcoin.
- Further, the absence of loss set-off provision would cause a double whammy —paying taxes on gains and no offset of losses.
- Tax experts believe that in certain cases, the effective rate of taxation can even cross 100% on crypto investments.
How will miners be affected?
- The government has clarified that mining infrastructure will also not be eligible to be deducted as the cost of acquisition.
- So far, it was understood by some that crypto generated during the ‘mining’ process is taxable only on the profits, after accounting for mining expenses such as electricity.
- But with the latest explanation, a 30% tax plus cess and surcharges will be levied on such transactions.
- Experts believe that crypto mining operations would become non-profitable under the current announcement.
Will crypto tax trigger an investor exodus?
- The crypto industry has been unequivocal in criticizing the tax proposals.
- Thanks to the tearing rally in crypto assets over the past two years, it is estimated by some that more than 20 million Indian investors have poured more than ₹1 trillion into cryptos.
- However, the industry leaders fear that the lack of provision to offset losses will drive away users from KYC-compliant exchanges and platforms to the underground peer-to-peer grey market, which would defeat the purpose of regulation.