The cryptocurrency industry has voiced significant concerns about the current taxation structure, emphasizing its potential impact on compliance, market liquidity, and innovation.
India’s taxation framework for cryptocurrency and other Virtual Digital Assets (VDAs) has introduced specific guidelines that impact investors, traders, and the overall crypto industry. The broad definition of VDAs encompasses cryptocurrency, Non-Fungible Tokens (NFTs), and digital tokens. Below are the key elements of this taxation regime:
- Flat 30% Tax on Gains
Gains from the sale of cryptocurrency and other VDAs are taxed at a flat rate of 30%, irrespective of the taxpayer’s income tax slab. This rate is significantly higher compared to other asset classes like equities, making it a stringent measure for crypto investors.
- 1% Tax Deducted at Source (TDS)
Since July 1, 2022, a 1% TDS is applicable on all crypto transactions. The TDS threshold is set as follows:
- ₹50,000 per annum for specified individuals, such as high-net-worth individuals and businesses.
- ₹10,000 per annum for all other taxpayers.
The TDS applies to transactions involving the sale, trade, or spending of cryptocurrencies. This measure aims to enhance transaction traceability.
- Taxation on Gifts and Airdrops
Crypto assets received as gifts or airdrops are taxable based on their fair market value. However, certain exemptions apply:
- Gifts from family members are exempt.
- Gifts valued below ₹50,000 annually are not subject to tax.
- Tax Treatment for Crypto Mining
Income from crypto mining activities is considered additional income and is taxed according to the individual’s applicable income tax slab. This distinguishes it from capital gains taxation on crypto trading.
- Taxation of Crypto-to-Crypto Trades
Exchanging one cryptocurrency for another is also subject to the flat 30% tax rate. Additionally, both parties involved in such transactions must deduct 1% TDS.
- No Loss Offsetting
The current framework does not allow offsetting or carrying forward of losses. For example, if an investor experiences a loss in one crypto transaction and a gain in another, they cannot offset the loss to reduce their overall tax liability. This provision is a significant departure from standard capital gains tax rules applied to other investment classes.
Also Read: Cryptocurrency Taxation in India
Industry Concerns and Recommendations
The cryptocurrency industry has voiced significant concerns about the current taxation structure, emphasizing its potential impact on compliance, market liquidity, and innovation.
- Reducing the TDS Rate Balaji Srihari, Vice President at CoinSwitch, suggests reducing the TDS rate from 1% to 0.01%. According to Srihari, this adjustment would simplify compliance, improve market transparency, and ensure effective transaction tracking, ultimately boosting tax revenues.
- Increasing the TDS Threshold Srihari also advocates raising the TDS applicability threshold from the current ₹10,000/₹50,000 to ₹5,00,000. This change would shield small investors and traders from excessive tax burdens and ensure more equitable tax treatment.
- Allowing Loss Offsetting and Carry-Forward Aligning the tax treatment of VDAs with other asset classes by permitting loss offsetting and carry-forward is a key demand from industry leaders. This provision would create parity with traditional investment vehicles and foster a more innovation-friendly environment.
Also Read: Demystifying Cryptocurrency Taxation in India 2023: A Comprehensive Guide
Conclusion
India’s cryptocurrency taxation framework represents a significant step in regulating the digital asset space, but it also presents challenges for investors and the industry. Addressing concerns related to TDS rates, thresholds, and loss treatment could strike a better balance between regulation, market development, and revenue generation, ultimately supporting long-term growth and innovation in the crypto sector.
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