Dubai: If you have made investments or explored “cryptocurrency” as an asset class, India’s recent budget released guidance clarifying how it will be taxed in the country.
There have been a number of theories surrounding digital currency in the country, particularly its legal recognition and validity – although some are still ambiguous.
Ongoing Ambiguity on the Crypto Tax Front
Let’s try to dig deeper to understand the extent to which India’s 2022 budget has provided much-needed clarity in the country’s potentially overflowing crypto landscape.
Whether you are a cryptocurrency enthusiast or a newbie crypto investor, the Indian budget has now clearly outlined some guidelines and regulations pertaining to it.
Crypto experts are now explaining how the latest regulatory change put an end to speculation about India’s impending ban on cryptocurrencies by introducing a 30% tax on the transfer of such assets.
For tax purposes, cryptocurrencies are now also defined as a “virtual digital asset” or VDA.
What is a “virtual digital asset” or VDA?
VDA has been defined as any information or code or number or token generated by cryptographic or other means, and which can be transferred, stored or exchanged electronically.
VDA, not being an Indian currency or a foreign currency, provides a numerical representation of the value that is exchanged with or without a counterparty. The VDA also includes non-fungible tokens (NFTs).
NFTs are unique, non-interchangeable digital tokens that can be traded using cryptocurrency. NFTs exist on a blockchain, allowing anyone to verify its authenticity and who it belongs to. Digital art, images, videos, text, music, and even virtual real estate and game items can be bought and sold as NFTs.
Does recognition of digital assets under income tax laws mean they have legal status? What are the gray areas? More importantly, what do the changes mean for investors?
How is crypto tax calculated in India?
When you need to calculate crypto income tax, only the cost of acquisition should be allowed as a deduction.
This means that no amounts related to other crypto expenses, be it transaction cost, interest related borrowing cost, etc., can be deducted.
However, such a tax is not applied on crypto income up to Rs250,000 (Dh12,288). Only amounts above this threshold are taxed.
What happens if I suffer a loss on a crypto transaction?
Let’s say you made a loss trading one crypto asset like Bitcoin and you make a profit selling another, say Ethereum.
In such a situation, can you deduct the Bitcoin losses from the capital gains made on Ethereum, thus reducing the taxable capital gains on the crypto-assets? No.
If a crypto amount transfer results in a loss, that loss cannot be offset by any other income, nor can that loss be carried forward to subsequent tax years.
What does this mean for a “loss to be offset against other income”?
Loss compensation means the adjustment of losses against the profit or income of that particular year. It is common practice to do so to reduce taxes on investment-related gains made by investors.
Losses that are not deducted from income in the same year can generally be carried forward to subsequent years to be deducted from income in those years.
What questions remain unanswered?
Analysts believe that there are still some ambiguities surrounding the taxation of crypto assets in India. One of the key aspects being that although the taxation of the transfer of such an asset has been clarified, there is no clarity on the taxation of activities such as the development and creation of crypto in India.
Additionally, if a person were to pay for a good or service using cryptocurrency in India, Dubai-based tax experts assess in more detail how difficult it is to know how such a payment will be considered – as a mode of payment or as a sale of cryptocurrency to another person. This also leads to other queries.
A follow-up question being whether the buyer of goods or the recipient of services will have to pay taxes separately on this transaction considering it a “transfer” of the crypto asset.
Likewise, whether the seller of goods or service provider, who uses crypto as a payment option, will have to deduct the tax (TDS) when receiving the payment.
What is withholding tax (TDS)?
TDS simply means that the person responsible for making specified payments is required to deduct a certain percentage of tax before making full payment to the recipient.
Analysts remind that it is also important to keep in mind that cryptocurrencies are mainly bought and sold in foreign currencies in India.
Thus, an increase or decrease in the value of the rupee will also cause the gain or loss to fluctuate. But how will such a gain or loss resulting from the fluctuation of the forex be treated for tax purposes?
How do other countries around the world tax crypto?
Governments around the world have taken different stances towards crypto assets. While some countries like China have completely banned digital assets, countries like El Salvador have declared it as legal tender.
Countries that are in favor of crypto assets are incorporating changes into their existing tax codes or enacting stand-alone legislation to address issues relating to these assets.
Singapore has enacted a new law that legalizes cryptography and establishes provisions to prevent illegal activities. From an income tax perspective, companies engaged in the buying and selling of digital tokens are taxed on profits derived from digital token trading.
However, no tax is levied if the gains arise from the disposal of digital tokens held as long-term investments. So, Singapore has given these digital assets the status of immobilization, unlike India.
The United States and Canada also consider cryptocurrency as capital. Any income from these assets is subject to tax. Canada has a system in place that tracks crypto investments and ensures accurate reporting of crypto investments and resulting tax liability.
The UK levies capital gains tax or income tax on crypto gains depending on the nature of the transactions. Similarly, the Australian government primarily views crypto as an asset for capital gains tax purposes.
Some countries like Germany and Portugal have implemented slightly relaxed tax rules for cryptocurrencies. In Germany, cryptocurrency is considered a private asset attracting personal income tax rather than capital gains tax only if sold in the year of purchase.
What is the difference between income tax and a capital gains tax?
Income tax is based on the income you earn throughout the financial year. Capital gains tax rates depend on how long you have owned or held the asset. Long-term capital gains are taxed at a lower rate than short-term capital gains.
In Portugal, crypto income is only taxable if it comes from a professional business activity. Additionally, no tax is levied on the exchange of cryptocurrency for another currency, implying that buying or selling cryptocurrencies would not be subject to capital gains tax.
At the end of the line ?
While it is important to understand the risks associated with investing in crypto, selecting the exchange for trading cryptocurrencies is one of the key tasks an interested investor should complete before getting started. in such digital currencies.
The crypto asset market in India is worth $15 billion (Dh55 billion), noted a report by India-based CREBACO, a cryptocurrency-focused research, rating and intelligence firm. The report further states that the crypto community in India could number more than six million people, or 0.5% of the country’s population. This includes residents and non-residents who also invest money earned abroad.
Crypto analysts explain how India is likely to enact a standalone law to regularize digital assets by adopting nationwide regulations. This means that no regulated entity will be able to deal in cryptocurrencies unless the regulations allow it.
With experts assessing how crypto can become the future of currencies across the globe, further clarification would help prevent any negative impact on digital asset trading and investments in the country. But we would have to wait and watch.
Nevertheless, crypto experts keep repeating that anyone wishing to buy cryptocurrencies like Bitcoin, among many others, should have a time horizon of five years and have a small allocation in their portfolio. In the long term, say five to 10 years, the price of Bitcoin, for example, can be between $100,000 (367,000 Dh) and $500,000 (1.8 million Dh) because the supply is low.
So remember that with potentially massive payoffs come incredibly higher risks.