By Archit Gupta
The Government of India has introduced the tax implications for cryptocurrency for the first time in the Union Budget 2022, while the Internal Revenue Service (IRS) of the US first addressed cryptocurrencies in 2014. Let us see the differences in the income tax treatment of cryptocurrencies of both countries.
Classification of Crypto Assets
In Budget 2022, the government has classified crypto assets as ‘virtual digital assets’. Although they have been defined as assets, virtual digital assets are not treated like other assets. The new income tax provision has been inserted for the taxation of virtual digital assets, which provides that 30% tax must be paid on the profits earned from the transfer of crypto assets. However, no deduction is allowed to be adjusted from the asset’s sale price, except the cost of acquisition.
However, in the US, cryptocurrencies are treated as capital assets. So, when a person transfers cryptocurrency at a profit, he/she is liable to pay tax depending on whether the assets are long-term crypto assets or short-term crypto assets. The US law states that assets sold after one year of purchase are classified as long-term capital assets. Long term assets are subject to lower tax rates. But if the assets are sold within a year of purchase, they are classified as short-term capital assets.Since the Indian tax law does not treat virtual digital assets as capital assets, crypto investors are not eligible for indexation benefits if the assets are held for long-term and face the full 30% tax rate irrespective of the period of holding.
Further, the US income tax law allows to claim the losses from crypto assets and set off against other income sources. Moreover, if any loss is unadjusted, it can be carried forward to set off against future investment gains. Similar treatment is given for losses incurred from the sale of capital assets in the Indian Income Tax Act, if there is any loss from sale of capital assets, it can be adjusted against the gain on sale of capital assets, subject to certain conditions. And for any loss that is unadjusted, it can be carried forward to eight subsequent years to set off against the future capital gains. But such benefit is not available to crypto investors if they incur loss on the sale of virtual digital assets. The treatment of gains or losses from virtual digital assets provided in the Indian income tax law is akin to income from gambling, horse racing and lottery winnings. For gambling and lottery winnings, too, the income is taxed at a flat rate of 30% without any deductions, and in case there is a loss, no set-off is allowed against other income.
Other Taxation Rules
The budget has also provided the buyers to deduct 1% TDS on the transfer of virtual digital assets if the sale value is above a specified limit. The budget states that the transferor is responsible to deduct and deposit the TDS amount before releasing the consideration. However, there is still ambiguity on the compliance part as buyers will not have all the details of the seller if the transaction is done through crypto exchanges.
Further, the gift received as crypto assets shall be taxable in the hands of the beneficiary. The definition of specified movable assets is expanded to include virtual digital assets. Therefore, the gifts received shall be taxable if the fair market value exceeds the threshold limit specified in the law. Also, the plain reading of the amendment made in the budget conveys that the gift received from relatives or received on specific occasions shall be exempt from tax.
The US tax law does not require to withhold tax at the time of payment of consideration for the crypto asset, and also receiving cryptocurrency as a gift is a non-taxable event to the recipient (donee). The recipient doesn’t have to pay tax or report it in their returns. However, at the time of sale of such a gift in future, the recipient will have to pay capital gains taxes. But the person who sends a gift needs to report the same if the value of the crypto assets gifted exceeds a certain specified limit.
Crypto Assets Received as Payments in the Business Transactions
As per US law, if any goods or services are purchased using crypto assets, such transactions shall be regarded as exchanging crypto assets for goods or services. The taxpayer is required to pay capital gains tax if the value of such assets exceeds the price which was initially paid for it.
Also, if the crypto asset is received as a payment for a business transaction, the fair market value on the date and time of receiving such crypto assets shall be treated as income and taxable at regular tax rates.
However, in the Union Budget 2022, the government has not clearly defined the situation where crypto is accepted in place of currency. The government has clarified that virtual digital assets are not currencies. However, the term ‘transfer’ has not been defined for virtual digital assets, but it is very well defined for capital assets in the Income Tax Act. The law needs to address what ‘transfer’ entails and whether it covers transactions where goods or services are purchased with cryptos. However, if the law clarifies to cover such transactions under the term ‘transfer’ then TDS provision will apply here, i.e. a person transferring crypto shall have to deduct tax at source (TDS) because a transfer has taken place. Such an event will be a tax event for the one transferring crypto.
Besides, there is no clarity on how the businesses shall report income for payment received via crypto. It may be the situation where the businesses will have to report income for the value (FMV) of crypto accepted as consideration towards providing goods and services. Once the business sells these cryptos or transfers them in any manner, again, an event of a transfer of crypto will take place, and tax may have to be paid on the transfer. The government has not clarified how one should value the crypto assets received as payment in business.
Tax Implications for Defi or Other Use Cases of Crypto
The Union Budget 2022 does not address any other income type such as staking, mining, lending, borrowing, airdrops, forks, wallet transfers, P2P transfers, gaming, gifting, donations, etc.
However, according to the US taxation rules, if you earn crypto assets by mining them or receive them as a promotion or payment for goods or services, it shall count as your regular taxable income. Tax is required to be paid on the entire fair market value of the crypto on the day it is received, at your regular income tax rate.
The author is Founder and CEO, Clear (formerly ClearTax).