Crypto Tax: How cryptocurrencies are treated in India and around the world

From speculative products to virtual digital assets (VDAs), cryptocurrencies have come a long way. From April 1 India introduced a tax on all VDAs. The law states that all income from the transfer of digital assets is taxed at 30%, with no deductions or exemptions. This would also apply to donating digital assets.

This comes at a time when countries are trying different approaches to regulate cryptos as more and more investors are entering this space in search of quick profits. In today’s column, we look at how India and other countries regulate digital assets.

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Understanding Crypto Tax in India

Before we get into crypto tax laws around the world, it’s important to understand: how crypto tax works in india. In India, a 30% income tax is levied on income derived from the transfer of VDAs, including NFTs. “Taxpayers cannot offset losses arising from one VDA against income from another VDA. Current tax laws allow taxpayers to offset their long-term losses against long-term capital gains. However, this is not allowed for VDA transfer income,” said attorney Ishan Kapoor, who works as a special counsel to law firms in Mumbai and New Delhi, advising on policy regulation and crypto tax matters.

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Kapoor explains that if you make a profit per Bitcoin (BTC) transfer and a loss on the Ethereum (ETH) transfer, you cannot deduct the loss from the ETH transfer from the profit per BTC transfer. “You will have to pay a 30% flat tax on BTC transfer profits,” adding that “losses from crypto transfers cannot be deducted from other income. Thus, investors cannot offset losses arising from the transfer of VDA with income from the transfer of another physical asset, such as real estate, stocks, or mutual funds.

In addition, losses arising from the transfer of VDA cannot be carried forward to the following year. This means that losses arising from the transfer of VDA cannot be offset by possible future gains arising in subsequent years.

Attorney Ishan Kapoor, works as a special counsel to law firms in Mumbai and New Delhi, advising on policy regulation and crypto tax issues. (Photo: Ishan Kapoor)

In addition, to integrate VDA transactions into the financial reporting system, each crypto transaction is subject to a 1% withholding tax deduction (TDS). It is proposed to levy a withholding tax of 1% on the total transaction value for VDAs from 1 July 2022. unfeasible as these merchants operate on very thin margins,” Kapoor told indianexpress.com.

What about other countries?

In the United States, VDAs are treated in the same way as equities. Any loss can be used to offset income tax from the ARV transfer up to a maximum cap of $3,000 and any other loss may be carried forward to the next fiscal year to be offset against future profits. Short-term capital gains are taxed at the higher tax bracket based on the decline in investors’ taxable income, and long-term capital gains (for ARVs held for more than 12 months) are taxed at a much lower rate – 0%,15 % and 20%.

As in the US, VDAs are treated in the same way as equities in the UK. If you buy and sell a VDA for personal investments, you must pay capital gains tax on the gain. The UK allows losses arising from the transfer of VDAs to be deducted from global capital gains.

In Canada, cryptocurrency is considered a commodity just like a stock. If your crypto is taxed as income, you pay income tax on the entire proceeds of a crypto transaction. If your crypto is taxed as capital gains, you only pay capital gains tax on half of the gains from a crypto transaction.

Meanwhile, there are countries like El Salvador that adopted Bitcoin as legal tender. The country has even announced a Bitcoin city for its residents where all transactions will be made through Bitcoin and therefore be free of property or capital gains taxes.

“Crypto remains unregulated”

It should be noted that Union Finance Minister Nirmala Sitharaman has: explained that taxing VDA transactions does not legitimize them. The Finance Bill 2022 defined VDAs in the newly introduced clause (47A) under Section 2 of the Computer Act 1961. However, the VDA market in India remains unregulated.

“In order to legally recognize VDAs under Indian laws, it is essential that the central government legislates to define and classify the different types of VDAs and regulate VDAs as a separate asset class in its own right. This can be done through a separate law or by amending the definitions of existing laws (such as the Securities and Contracts Regulation Act),” notes Kapoor.

All entities involved in the process of providing a VDA buying and selling platform (i.e. exchanges, brokers) play the role of technology intermediaries. These intermediaries must be regulated by law.

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