Written by Sharmita Kar | Edited by Chandrashekar Srinivasan, New Delhi
New tax rules regarding virtual assets, like cryptocurrencies and NFTs, or non-fungible tokens, under the Finance Bill 2022 are effective from Friday, April 1. As announced during the budget speech by finance minister Nirmala Sitharaman, all gains from trading in cryptocurrencies and similar digital assets will now be taxed at a flat 30 per cent, while another 1 per cent tax deducted at source (TDS) will be calculated when any such transaction takes place. The ‘crypto tax’ is listed under the new section of the finance bill – Section 115BBH – that deals with tax on virtual digital assets (VDAs).
Investors were worried that the tax rate is too high but Nirmala Sitharaman later clarified this is an initial step on taxing continuing trade and a more detailed framework may be developed in the future.
Here are 5 rules for cryptocurrencies and NFTs one must be careful of while investing:
- The 30 per cent tax rate will be applicable not on the invested amount but the income from the sale of virtual digital assets. Although the government has not clearly defined what exactly comes under ‘virtual assets’, cryptocurrencies and NFTs are definitely a part of it.
- There will be no tax deduction on expenses incurred during VDA transactions, other than the cost of acquiring such assets. Any loss incurred from cryptocurrencies and NFTs will also be ignored for tax calculations. Only profits will be taxed.
- However, any loss incurred from virtual assets cannot be set-off against other incomes (from shares, mutual funds, etc). Loss drawn from digital assets can also not be carried forward to the next financial year.
- The government has also decided to deduct 1 per cent TDS on all transactions involving virtual digital assets. This means any sale of digital tokens, at profit or loss, will attract 1 per cent TDS. However, a person can file for tax returns in case of a loss. The threshold limit for TDS is 50,000 for a year. Notably, the provisions for 1 per cent TDS will be effective from July 1, 2022.
- The crypto tax also applies to all virtual digital assets received as gifts. In such a case, the recipient will be taxed at 30 per cent on the income from cryptocurrencies and NFTs.