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 any income from the transfer of digital assets would be taxed at 30% with no deductions or exemptions. This would also apply to the donation of digital assets.
This comes at a time when countries are trying different approaches to regulating cryptos, as more and more investors are entering this space, looking to make quick profits. In today’s column, we take a look at how India and other countries regulate digital assets.
Understanding Crypto Tax in India
Before we dive into crypto tax laws around the world, it is important to understand how crypto tax works in India. In India, an income tax of 30% is levied on income derived from the transfer of VDAs, including NFTs. “Taxpayers cannot offset losses resulting 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 income from the transfer of VDA,” said lawyer Ishan Kapoor, who works as a special adviser to law firms in Mumbai and New Delhi, advising on matters relating to policy regulation and crypto-tax.
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Kapoor explains that if you make a profit per Bitcoin (BTC) transfer and a loss from 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 transfer cannot be deducted from any other income. Thus, investors cannot offset losses resulting 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 resulting from the transfer of VDA cannot be carried forward to the following year. This means that losses resulting from the transfer of VDA cannot be offset by potential future gains arising in subsequent years.
Additionally, 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 apply a withholding tax of 1% on the total transaction value for VDAs from July 1, 2022. is likely to do day trading, margin trading, etc. unfeasible, given that these merchants operate on very thin margins,” Kapoor told indianexpress.com.
What about other countries?
In the United States, VDAs are treated the same as stocks. Any loss can be used to offset income tax from the ARV transfer with a maximum limit of $3,000 and any other loss can be carried forward to the next fiscal year to be offset against any future gain. 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 longer than 12 months) are taxed at a much lower rate — 0%, 15% and 20%.
As in the US, VDAs in the UK are treated the same as shares. If you buy and sell a VDA for personal investment, you must pay capital gains tax on profits. The UK allows losses resulting from the transfer of VDAs to be deducted from global capital gains.
In Canada, cryptocurrency is considered a commodity, like a stock. If your crypto is taxed as income, you will pay income tax on the entire proceeds of a crypto transaction. If your crypto is taxed as a capital gain, you will only pay capital gains tax on half of the profits from a crypto transaction.
Meanwhile, there are countries like El Salvador who adopted Bitcoin as legal tender. The country has even announced a Bitcoin City for its residents where all transactions will be done through Bitcoin, therefore, will be free from any property or capital gains taxes.
“Crypto Remains Unregulated”
It should be noted that Union Finance Minister Nirmala Sitharaman has declared 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.
“To legally recognize VDAs under Indian laws, it is essential that, through legislation, the central government provides definitions and classifications of the different types of VDAs and regulates VDAs as a distinct asset class in themselves- same. This can be done through a separate law or by amending the definitions of existing laws (such as the Securities and Contracts Regulation Act),” Kapoor notes.
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.