By Avinash Shekar
The crypto market has gained significant traction recently, especially with the growing popularity of Perpetual crypto futures within the crypto asset space. These perpetual futures stand out as some of the most widely used and liquid instruments in the crypto market.
In the recent budget, which outlined policies to promote digitalisation, two key aspects concerning India’s youth were emphasised. Firstly, the budget recognized their aspirations, and secondly, it acknowledged that these aspirations could be realized through innovative and disruptive technology. These policies aim to catalyze a surge in research and innovation, particularly in dynamic areas like crypto, blockchain, and Web3 technologies, aligning with the tech-reliant nature of the current generation.
What are perpetual crypto futures?
Perpetual futures, a type of derivative contract enabling customers to trade on the future price of an asset without an expiration date, have become popular. Unlike traditional futures contracts with fixed expiry dates, perpetual futures can be held indefinitely, providing exposure to selected crypto assets without the need for direct purchases. Their appeal lies in their flexibility and absence of expiration, offering a seamless trading experience for those pursuing long-term or short-term strategies.
As more traders in India engage in future trading of crypto assets, it becomes crucial to understand the associated tax implications.
Taxes Nuances:
1%TDS Tax: The 2022 budget in India introduced crypto holders to a 1% TDS and flat 30% on all crypto gains. The thing to note here is that the TDS will be deducted on the final sale amount and not just on the profits. This is because, in the case of TDS, it doesn’t matter if you earn a profit or book a loss on your trade. It will be deducted, no matter what.
Virtual Digital Assets: In the budget 2022 a ‘flat rate’ was introduced for taxing income earned from the sale of Virtual Digital Assets (VDAs) like crypto, non-fungible tokens (NFTs). The new tax rate for VDA came into effect from the financial year 2022-23. As per the new tax rules, the income generated from the sale of crypto assets, VDAs, NFTs, from FY 2022-23 onwards will be subject to a tax rate of 30% and applicable surcharge and cess. It is important to note that you cannot avail deductions for any expenses other than the cost of acquisition when calculating such income.
Set off loss: The Union Budget 2022 introduced Section 115BBH, which dealt with taxation provisions concerning Virtual Digital Assets (Cryptocurrencies & NFTs). Section 115 BBH(2)(b) provides that no set-off of loss from the transfer of the virtual digital asset computed shall be allowed against income computed under any other provision of this Act to the assessee. Such loss shall not be allowed to be carried forward to succeeding assessment years.
Taxes on futures: While taxes are currently imposed under the Virtual Digital Asset (VDA) Section 2(47A) on crypto, it’s crucial to note that Crypto futures, being a derivative instrument, are not classified as VDAs. This distinction arises from the fact that settlement in crypto futures occurs through methods other than actual delivery. Consequently, the business involving crypto futures will be categorised as any other business income, subject to the rules of set-off and carry-forward of losses. There is no generation of information, code, number, or token as a result of execution of a crypto asset derivative instrument. Therefore, a crypto derivative shall not qualify as VDA u/s. 2(47A) of the Act and thus, shall be outside the purview of Section 115BBH of the Act.
No transfer involved : No Transfer, No VDA Tax: Section 115BBH imposes taxes on income resulting from the “transfer of virtual digital assets.” The term ‘transfer’ here is derived from Section 2(47), specifically the definition of ‘transfer,’ signifying the deliberate release of an asset and the extinguishing of associated rights. To execute a transfer through relinquishment, an individual must abandon or surrender their interest in the property.
For a transfer by extinguishment of rights, the asset in question must persist even after the rights are extinguished. It’s crucial to distinguish between the extinguishment of rights over an asset and the asset’s complete extinction. In the context of crypto derivatives, as the contract concludes, there is no lingering existence of the derivative instrument, ruling out both relinquishment and extinguishment of rights. Consequently, the conditions for the application of Section 115 BBH are not met when there is no continuity of the asset or rights post-exit from the crypto derivative.
In conclusion, the tax landscape for crypto futures in India is nuanced. While Virtual Digital Assets face 1% TDS, flat 30% taxation and no setoff of losses crypto futures operate in a different sphere, escaping the stringent tax obligations associated with VDAs (normal slab wise tax applies). Understanding these distinctions is crucial for investors navigating the complex world of cryptocurrency trading
The author is co-founder, Pi42
