Crypto tax can go upto 43% for HNIs: Sandeep Jhunjhjnwala, Partner, Nangia Andersen LLP

Crypto tax can go upto 43% for HNIs: Sandeep Jhunjhjnwala, Partner, Nangia Andersen LLP

Sandeep Jhunjhjnwala, Partner, Nangia Andersen decodes in detail the provision relating to cryptocurrency tax.

Sandeep Jhunjhjnwala, Partner, Nangia Andersen LLP Sandeep Jhunjhjnwala, Partner, Nangia Andersen LLP

Cryptocurrencies will now be taxed at the blanket rate of 30 per cent. Though the announcement made in the Budget 2022 has brought much needed clarity, many still wonder about its calculation part. For example, does one need to pay tax while using cryptocurrency to purchase goods? How to determine cost of acquisition in case of mining? Sandeep Jhunjhjnwala, Partner, Nangia Andersen LLP decodes for Business Today how this newly introduced tax works.

BT: What are some of the challenges while computing cryptocurrency tax?

Sandeep Jhunjhjnwala (SJ): The characterisation of the income streams to a miner, a buyer or a secondary seller may not be clear in existing tax treaties and may be a subject to different characterisation in overseas jurisdictions leading to potential cases of double taxation or double non-taxation when one of the parties in a virtual digital assets (VDA) transaction is a non-resident. Also, the 30 per cent tax rate is the base rate and could go upto an effective 43 per cent in case of HNIs falling in the highest surcharge bracket. Valuation of VDAs for the purpose of arriving at income chargeable to tax in the hands of a recipient who has received VDAs as a gift will also pose challenges given the volatile nature of the crypto assets unless valuation guidelines are prescribed by the Government.

BT: What will be a taxable event?  Apart from selling, will it also cover other events such as paying in crypto or trading one crypto for another?

SJ: The proposed 30 per cent crypto tax and the liability to withhold taxes under Section 194S are sought to be invoked on occurrence of "transfer" of crypto assets which are officially nomenclated as virtual digital assets. Therefore, the taxable event in such transactions would be transfer of a VDA. The term "transfer" is defined in the IT Act to include a sale, exchange or relinquishment of asset or the extinguishment of any rights therein.

While the definition of the term "transfer" in itself encompasses exchange transactions, the proposed TDS provisions also specifically envisage scenarios of barter or exchange where payment is partly or wholly in kind and there is no movement in cash. Therefore, an investor will suffer TDS even in a situation where one uses crypto to buy something or even when one trades one crypto for another.

BT: What could be some of the challenges in determining cost of acquisition?

SJ: The proposed Section 115BBH does not define cost of acquisition for a VDA. It is not clear if the definition of cost of acquisition provided in Section 55 can be referred to for the purpose of VDAs, as Section 115BBH appears to be a complete code in itself. In the absence of a specific definition of cost of acquisition for a VDA, it will have to be understood in its general sense which would mean that the cost at which the VDA was purchased by the investor.

There could be challenges in determining the cost of acquisition of a mined VDA sold to an investor which could be regarded as a transfer of VDA by the income tax authorities. This is because for the miner, the VDA is a self-generated asset having no cost of acquisition.

Having said so, it would not be unreasonable to contend that the expenses incurred in setting up the mining equipment and incidental expenses necessary for mining the VDA should be considered as cost of acquisition of the VDA. However, there is no clarity on such treatment.

On application of FIFO, one could draw parallel from transfer of shares held in DEMAT account. Section 45(2A) prescribes FIFO method for determining the cost of acquisition and period of holding of shares transferred from a DEMAT account. On the crypto front, where a specific linkage between the assets sold and the asset purchased cannot be drawn, guidance could be taken from these provisions to apply FIFO method where the asset pool is fungible and cannot be differentiated. A specific clarification, though, is definitely warranted.

BT: How will taxation work in case of mining and airdrops?

SJ: For miners and air-droppers, it could be argued that their activity is being carried out with the intention to earn profit and, therefore, income earned through mining is business income in nature. Concerns, however, may arise around the valuation of these cryptocurrencies for determining the amount of business income.

Also, aspects such as application of the restriction on claiming deductions for expenses, treatment of subsequent disposal of these currencies transfer of the asset attracting 30 percent tax, would require deliberations.

In case of a recipient of airdropped VDAs, since the VDA is given to the recipient for no consideration, as a gift, there could be taxation in the hands of the recipient.

The entire fair market value of such VDA could be taxable in the hands of the recipient at the applicable slab rates as income from other sources, if such value exceeds INR 50,000.

BT: What are your views on 1 per cent TDS? Will it put an extra burden on crypto users?

SJ: There will be practical challenges for the buyer to identify the seller of a crypto. Further, TDS provisions are also applicable on 'in-kind' payments. This could lead to cash flow issues for the buyer who will have to arrange for funds to deposit taxes with the exchequer. Further, in cases of a crypto barter, obligation to deduct tax could fall both on buyer and seller. Levy of TDS on transfer of a VDA will also reduce the margins for active traders and the TDS provisions are a burden for volume trading. The TDS provisions are applicable to non-residents too and the practical challenge of identifying the seller could get accentuated in such cases.

BT: There are restrictions relating to carrying forward losses? Can one set off loss arising from one currency against the gain from another within the same financial year?

SJ: Basis a verbatim reading of the crypto tax provisions (Section 115BBH), it appears that the restriction of setting off of losses arising from the transfer of VDA is only against income computed under any other provisions of the IT Act. Hence, there seems to be no restriction to set off losses arising from one class of VDA, say, Bitcoin against gains from another class, say, Ethereum within the same financial year.

However, losses from transactions in VDA which have not been set off inter se within the financial year, cannot be carried forward to the subsequent years. Having said so, the income tax authorities may still contend that the provisions envisage that any loss from transfer of a VDA is a sunk cost and the seller is liable to pay tax on every profit made on transfer of a VDA.

Published on: Feb 03, 2022, 8:37 PM IST
Posted by: Vivek Dubey, Feb 03, 2022, 8:05 PM IST