The Indian government has tightened bolts for trading in cryptocurrencies. Right from taxation on crypto gifts to prohibiting hedge of loss in cryptocurrency with gains of another digital asset. In simple words, a loss from Bitcoin assets cannot be set off from income in ApeCoin or any other virtual digital assets as a matter of fact. A tax of 30% is levied on any income from the transfer of crypto assets. The new tax provisions are set to come into effect from April 01, 2022. This has led to mixed opinions and overwhelming responses in the blockchain industry. While investors contemplate on whether to book profits or even losses in their cryptocurrency assets before March 31, 2022.
On Friday, Lok Sabha approved taxation rules on virtual digital assets (VDAs) or “crypto tax” that was proposed in Budget 2022-23 by clearing the Finance Bill 2022. These new tax rules are set to become effective from April 01, 2022.
Under the bill, section 115BBH deals with taxes on virtual digital assets, while clause (2)(b) prohibits setting off a loss from crypto assets against income under “any other provision” of the IT Act. Also, the word “other” is dropped for VDAs under the bill.
With that, a 30% capital gains tax is imposed on crypto transactions. Further, a loss incurred during the transfer of the virtual asset will no longer be allowed to set off against any income calculated under the “other” provision of the IT Act as the word “other” has been removed.
That means, no matter what your income level is from crypto assets, they will be liable for the 30% tax rate from April 01, 2022. Taking this into consideration, if an investor decides to book their profits or losses in their crypto assets before March 31 then he or she will pay tax at a marginal rate.
Not just that, an investor will also not be allowed for adjustment of their loss incurred in one crypto asset against the income bagged in other cryptos from April 01. With that, at least before March 31, investors can still adjust their losses in cryptos against other capital gains.
Additionally, the amendment under the bill also directs 1% tax deducted at source (TDS) on Indians buying or selling cryptos along with taxes on crypto gifts. Unlike, the 30% tax on capital gains in VDA, the TDS will come into effect starting July.
Finance Minister Nirmala Sitharaman during the discussion on Finance Bill 2022 in the Lok Sabha said, “There is no confusing signal. We are very clear that there are consultations going on as to whether we want to regulate it or regulate it to some extent, or very much or totally ban it. After the consultations are concluded, the matter will come out, but till then we are taxing it as lot of transactions are happening there.” She added that the government made its position clear and said it will tax money-generating because people are taking money and assets are being bought and sold.
Impact of Finance Bill 2022 on cryptocurrency and investments.
Probir Roy Chowdhury, Partner, J Sagar Associates (JSA) said, “While many in the cryptocurrency industry initially welcomed the inclusion of ‘virtual digital assets’ in the Finance Bill, 2022 (“Finance Bill”) – heralded as the government’s implicit acceptance of cryptocurrency, a deeper look at the Finance Bill demonstrates the government’s reluctance to encourage growth in this space. The Finance Bill seeks to impose a flat tax of 30% on cryptocurrency gains. While this would result in a 5% increase in tax payable by companies in trading in cryptocurrency, this would more significantly affect smaller ‘retail investors’ who may be in lower tax brackets or have been relying on lower capital gains tax rates.”
Chowdhury further added, “The volatility of many cryptocurrencies has created a burgeoning community of high-frequency traders, who will be significantly affected by the drop in liquidity on each trade.”
“Finally, the biggest setback to the Indian cryptocurrency industry is the Finance Bill’s prohibition of setting off losses in one cryptocurrency against gains from another. Such a move could cripple the industry and severely affect traders who rely on hedging to ensure risk mitigation in their investments. Crypto players need to present a united front and challenge these overbearing provisions. Trading in crypto/virtual digital assets is not akin to gambling and this distinction needs to be made clear,” Chowdhury added.
Trading in the cryptocurrencies market has been a controversial concept due to its decentralized nature and lack of transparency. The cryptocurrencies do not have any intermediary such as banks, financial institutions, or central authorities. The nature of cryptocurrency is more like a bubble currently, it has its extreme highs and lows, and having a clear trajectory on these digital coins is broadly uncertain. However, trading in the crypto market is similar to buying and selling other used currencies. At present, the world of digital currency has evolved and indeed is seen as the new era of digital trading to further strengthen the blockchain market.
As per CoinMarketCap, there are about 18,470 cryptos available for trading with a global market cap of more than $ 2 trillion. Bitcoin continues to be the leader of the crypto market followed by Ethereum, Tether, BNB, USD Coin, XRP, Cardono, Solana, Terra, and Avalanche among others.
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