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1. A flat 30% tax is levied on the sale of crypto in India fromscheduled tribe April 2022. Some people have started finding unique ways to save this tax legally and it is explained in detail below.
topics covered
- 30% tax on the sale of bitcoin and other crypto
- 1% TDS on sale of bitcoins and other cryptos
- tax time
- GST on bitcoin and other cryptos
- How to Save Tax on the Sale of Bitcoin and Other Crypto
30% tax on the sale of bitcoin and other crypto
Budget 2022 introduced a new concept called Virtual Digital Asset and all cryptos like Bitcoin, Ethereum etc as well as NFTs have been included in the definition of Virtual Digital Asset.
Profits from all virtual digital assets are taxed at a flat rate of 30% and hence a flat rate tax of 30% applies to gains from cryptos like Bitcoin, Ethereum etc. In addition, income will not be classified as capital. Tax will be charged on the head of profit and other sources.
If there is a loss from the sale of a crypto – it will not be allowed to be set-off with the profit arising from any other source of income like trading income, capital gains etc. Loss on the sale of one crypto trade will not be allowed set-off with profit on the sale of another crypto trade. Crypto losses will also not be allowed to be carried forward to the next year.
For example: I have a profit of Rs. 5,00,000 in the month of May by trading in bitcoin but loose Rs. 3 lakhs on the sale of another bitcoin trade in the month of June. Thus, my actual profit is Rs. 2 lakh only.
However, for the purpose of levying income tax, my income will be treated as Rs. 5 lakh and not 1 lakh and the same will attract 30% tax. 30% of 5 lakh = Rs. 1.5 lakh will be the tax payable in this case. The loss on the sale of a crypto cannot be set off with a profit on the sale of another crypto to reiterate.
Author’s point of view: I personally think this is very unfair. In some transactions, crypto traders make a loss and in some transactions – they make a profit. Actual profit is that which comes out after taking into account the profit and loss. When stock market traders are allowed to set-off their losses and gains, why are crypto traders not allowed to set their own gains and gains?
please pay attention: Crypto losses cannot be set-off with crypto gains or other income. But losses from other income can be set-off with crypto gains. Say for example, I have a loss of Rs. 2 lakh in my business and make profit of Rs. 5 million in crypto trades. In such a case, my taxable income will be Rs. 3 lakh only on which 30% tax will be levied.
To reiterate, losses on the sale of crypto cannot be set-off, but losses from any other source of income can be set-off with crypto gains.
1% TDS on sale of bitcoins and other cryptos
1% TDS i.e. tax deducted at source is also 1. will apply fromscheduled tribe On sale of all Virtual Digital Assets like NFTs, Cryptos etc from April 2022. This 1% TDS deducted under section 194S will be required to be deducted on the sale price and not on the capital gain.
While filing ITR, the individual will be able to claim credit of this 1% TDS which has already been deducted.
Author’s point of view: A lot of people were trading in crypto and were not paying taxes on such income. To ensure that there is no tax evasion – the government has introduced TDS on such transactions. This will ensure that the government has complete data on who has sold the amount of digital assets.
This TDS will be applicable whether the crypto is being sold at profit or loss. While this will cause working capital blockage especially for very active traders, it will also ensure that the government has all the data and will be able to crack down on tax evaders easily.
tax time
The above tax will be levied at the time of sale of the property and not at the time the money is withdrawn to the bank account. Thus, if a person has sold crypto and received money in his crypto wallet but not withdrawn to his bank account – tax will still be paid in the year in which the crypto is sold and the year Not in which the money has been deposited in the bank account.
Even if a person sold 1 crypto to buy another crypto, it would also be considered a case of sale and would be treated as a barter transaction. However, in this case the INR is not received – it will be considered a case of sale as the crypto has been sold.
The same law will apply when crypto is sold on Forex.
This law applies to everyone who is resident in India but does not apply to NRIs or individuals who have entities outside India or if the crypto is sold by a foreign entity.
gst on crypto
The government is considering levying GST on crypto transactions in India. It has been in discussion for many years that GST @ 28% should be levied on crypto transactions as well. This will be in addition to the 30% tax already levied.
However, till date – the government has not levied 28% GST on crypto transactions.
How to save tax on the sale of crypto in 2022
Taxes levied on crypto, NFTs and other virtual digital assets in India are very harsh. The fact that expenses cannot be deducted, losses cannot be compensated, it makes the tax laws even more stringent.
This law is applicable to all those who are resident in India but not to NRIs and entities that are registered outside India.
To avoid such harsh tax, many active Indian crypto traders have started incorporating the entity outside India in tax havens like Dubai where there is no tax. They do business through their foreign entities and no tax is applicable in India.
Units in places like Dubai can only be made from India without the need to reside in Dubai. Many people who are active crypto traders have set up units in Dubai while living in India. to quote: How to set up a unit in Dubai from India
Section 6 of the Income Tax Act also provides that so long as the turnover of the foreign entity is less than Rs. 50 crores per annum, the Government of India cannot impose tax on the foreign entity even if the owner of the foreign entity is residing in India as the effective management rules do not apply in this case.
A lot of people are making use of this stream and incorporating entities outside India in places like Dubai and saving a huge chunk of taxes. They are engaging entities outside India not only to save tax on their crypto income but also to save tax on their business income which they can generate from various sources.
This tax planning can be applied to other tax havens as well such as Malta, Cayman Islands, British Virgin Islands, Cyprus, Bahamas etc but most of these are far away from India, so Indians move to the nearest possible tax haven I like it. Dubai.
Such entities are typically included in freezone areas in Dubai that have no tax, compared to mainland areas in Dubai where a 9% corporate tax is being levied from 2023.
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