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Inside the Crypto Tax Regime Announced in Budget 2022-23

Crypto activities will carry a 30% tax rate.

Government of India in its Budget for Financial Year 2022-23 announced the taxation regime for crypto assets.

It means that the Government does not plan to ban cryptocurrency. Taxation is a major step towards regulation.

Moreover, regulators are adopting blockchain, which will power the upcoming Central Bank Digital Currency (CBDC) to be issued by the Reserve Bank of India (RBI). The CBDC will be rolled out in the Financial Year 2022-23.

Tax Regime on Crypto

Minister of Finance, Ms. Nirmala Sitharaman proposed that any income from the transfer of any Virtual Digital Asset shall be taxed at a rate of 30%. This may not concern those with incomes above INR 10 lakh per annum as they already pay the same tax rate.

She added that no deduction in respect of any expenditure shall be allowed while computing the income, except the cost of acquisition. So, you may not be able to save taxes on crypto by showing any expenditure upon your net income.

Further, the loss from the transfer of Virtual Digital Asset cannot be set off against any other income.

Other than income arising from crypto, a Tax Deduction at Source (TDS) shall be levied on payments made in relation to transfer of Virtual Assets at the rate of 1% of such consideration above a monetary threshold.

Gift of Virtual Asset is also proposed to be taxed at the receiver’s end.

Questions Needed to be Answered Further

Some questions are arising out of the statements made by the Minister of Finance. To have a clear picture they are needed to be answered.

It needs to be known what is the definition of a transfer. 

Regarding the Gift Tax, will airdrops be considered a ‘gift’ or ‘income’? Gifts up to INR 50,000 in a year are exempt from Gift Tax.

The complete draft proposal will clear out all the ambiguities.

Possible Implications of the Tax Regime

Many retail investors may be tempted to move to other financial markets such as stocks.

Moreover, some crypto community members believe that crypto investors could move their assets to foreign crypto exchanges or Decentralized Exchanges (DEX).

Freelancers who get paid in crypto from domestic or overseas clients will also be hurt. Moreover, this tax regime will force crypto entrepreneurs to move their headquarters to overseas locations with a more favourable regime.

A tax regime on a certain activity means activity is recognized by the Government. However, a higher tax rate means the Government is dissuading people from carrying out that activity. The same is the case with crypto. Government of India has expressed its disapproval of crypto in past on the grounds that it undermines the sovereign currency of the country. Nevertheless, the Web3 community must be glad that regulatory clarity is imminent.

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