Flat 30% Tax has been levied on the sale of cryptos in India from 1st April 2022. Some people have started finding unique ways to legally save this tax and the same is explained below in detail.
Topics Covered
- 30% Tax on Sale of Bitcoin & other Crypto
- 1% TDS on Sale of Bitcoin & other Crypto
- Time of Levy of Tax
- GST on Bitcoin & other Crypto
- How to save Tax on sale of Bitcoin & other Crypto
30% Tax on Sale of Bitcoin & other Crypto
Budget 2022 introduced a new concept called Virtual Digital Asset and all crypto’s like Bitcoins, Etherium etc as well as NFT’s are included in the definition of Virtual Digital Asset.
A flat rate of tax of 30% has been levied on gains arising from all Virtual Digital Assets and therefore a flat rate of 30% tax is applicable on gains arising from crypto’s like Bitcoin, Etherium etc. Moreover, income would not be classified as Capital Gains and would be taxed under head Other Sources.
If there is any loss arising from the sale of any Crypto – the same would also not be allowed to be set-off with gains arising from any other source of income like Business Income, Capital Gains etc. The loss on sale of one crypto trade would also not be allowed to be set-off with gains on sale of another crypto trade. The crypto losses would not even be allowed to be carried forward to the next year.
For eg: I make a gain of Rs. 5,00,000 in the month of May by trading in bitcoins but loose Rs. 3 Lakhs on the sale of another bitcoin trade in the month of June. Thus, my actual gain is Rs. 2 Lakhs only.
However, for the purpose of levy of Income Tax, my income would be considered as Rs. 5 Lakhs and not 1 Lakhs and 30% Tax will get levied on the same. 30% of 5 Lakhs = Rs. 1.5 Lakhs would be the tax payable in this case. To re-iterate loss on sale of crypto’s cannot even be set off with gain on sale of another crypto.
Author’s View: I personally feel this is very unfair. In some transactions, crypto traders make losses and in some transactions – they make gains. Actual profit is what emerges after taking into account the profits and the losses. When share market traders are allowed to set-off their losses and gains, why are crypto traders not allowed to set off their profits and gains?
Please Note: Crypto losses cannot be set-off with crypto gains or other incomes. But losses from other incomes can be set-off with Crypto gains. Say for example, I incur a loss of Rs. 2 Lakhs in my business and make a profit of Rs. 5 Lakhs in Crypto trades. In such a case, my taxable income would be Rs. 3 Lakhs only on which 30% tax would be levied.
To re-iterate, loss on sale of crypto’s cannot be set off but loss from any other source of income can be set-off with crypto gains.
1% TDS on Sale of Bitcoin and other Crypto
1% TDS i.e. Tax Deducted at Source would also be applicable from 1st April 2022 onwards on sale of all Virtual Digital Assets like NFT’s, Crypto’s etc. This 1% TDS deducted under Section 194S would be required to be deducted on the Sale Price and not on the Capital Gain.
At the time of filing of the ITR, the person would be able to claim credit of this 1% TDS which has already been deducted.
Author’s View: A lot of people were trading in crypto’s and were not paying taxes on such income. To ensure that, there is no tax evasion – the govt has introduced TDS on such transactions. This will ensure that govt has all data about who has sold how much amount of digital assets.
This TDS will be applicable whether the crypto is being sold at a profit or at a loss. Although, this will lead to working capital blockage specially for very active traders, this will also ensure that Govt has all the data and will be easily able to crackdown on tax evaders.
Time of Levy of Tax
The above mentioned taxes would be levied at the time of sale of asset and not at the time of the money is withdrawn to the bank account. Thus, if a person has sold the crypto and has received the funds in his crypto wallet but not withdrawn to his bank account – tax would still be liable to be paid in the year in which the crypto has been sold and not in the year in which the money has been withdrawn to the bank account.
Even if a person has sold 1 Crypto to buy another Crypto, this would also be considered as a case of sale and would be considered as a Barter transaction. Although, INR has not been received in this case – it would be considered as a case of sale as Crypto has been sold.
The same law would also apply even if the crypto is sold on a foreign exchange.
This law is applicable to everyone who is a resident in India but not applicable to NRI’s or to individuals who have entities outside India or if the crypto is sold by foreign entity.
GST on Crypto
The Govt is contemplating levying GST on Crypto transactions in India. This has been under discussion for several years that GST @ 28% should also be levied on crypto transactions. This would be in addition to the 30% Tax already levied.
However, till date – the Govt has not levied 28% GST on Crypto Transactions.
How to Save Tax on Sale of Crypto in 2022
The tax levied on cryptos, NFT’s and other Virtual Digital Assets in India is very harsh. The fact that expenses cant be deducted, losses cant be set-off makes the tax laws even harsher.
This law is applicable to everyone who is a resident in India but not on NRI’s and those entities which are registered outside India.
To save such harsh tax, a lot of active Indian crypto traders have started incorporating entity outside India in tax havens like Dubai where there is No Tax. They trade via their foreign entities and no tax gets applicable in India.
Entities in places like Dubai can be created from India itself without any need to reside in Dubai. A lot of people with active crypto traders have established entities in Dubai while residing in India. Refer: How to set up a Entity in Dubai from India
Section 6 of the Income Tax Act also mentions that till the time the turnover of the foreign entity is less than Rs. 50 Crores p.a., the Indian Govt cannot levy tax on the foreign entity even if the owners of the foreign entity are residing in India as the Place of Effective Management Rules don’t apply in this case.
A lot of people are making use of this Section and incorporating entities outside India in places like Dubai and saving a huge chunk of taxes. They are incorporating entities outside India not only to save tax on their crypto income but also to save taxes on their business income which they may be generating from different sources.
This tax planning can be applied to other tax havens as well like Malta, Cayman Islands, British Virgin Islands, Cyprus, Bahamas etc but as most of these are very distant from India, therefore Indians prefer to go to the nearest possible tax haven which is Dubai.
Such entities are normally incorporated in Freezone areas in Dubai where there is No Tax as compared to the Mainland areas in Dubai where 9% Corporate Tax is getting levied from 2023.
