Crypto Tax: FAQ on Taxation of Crypto, Virtual Digital Assets in Works

The government is working on a cryptocurrency taxation FAQ that will provide nuanced clarification on the applicability of income tax and GST to virtual digital assets, an official said.

The Frequently Asked Questions (FAQ) set, which is being prepared by the Department of Commerce (DEA), the RBI and the Treasury Department, would also be reviewed by the Justice Department, the official added.

“FAQ on taxation of cryptocurrency and virtual digital assets is in the works. Although FAQs are for informational purposes and have no legal validity, the Department of Justice’s opinion is sought to ensure there is no loophole,” the official told PTI.

The DEA, Revenue Department and Reserve Bank are working to ensure that the tax aspect is clear to both field tax offices and those dealing with cryptocurrencies and other virtual digital assets.

The 2022-23 budget has brought clarity regarding the collection of income tax on crypto assets. From April 1, such transactions will be subject to 30 percent income tax plus duties and surcharges, as tax law treats profits from horse racing or other speculative transactions.

The 2022-23 budget also proposed a 1 percent TDS (tax deduction at source) on virtual currency payments over 10,000 rupees in a year and taxing such gifts in the hands of the recipient.

The threshold limit for TDS would be Rs 50,000 per year for certain individuals which includes individuals/HUFs who are required to have their accounts audited under the IT Act.

The 1 percent TDS provisions will come into effect on July 1, 2022, while profits will be taxed effective April 1.

From a GST perspective, the FAQ should provide clarity as to whether cryptocurrency is a commodity or a service.

Currently, 18 percent Goods and Services Tax (GST) is only levied on services provided by crypto exchanges and they are categorized as financial services.

The GST law does not clearly mention the classification of the cryptocurrency. In the absence of a law regulating such virtual digital currencies, the classification must take into account whether the legal framework classifies them as an “enforceable claim”.

An enforceable claim is a claim that may be enforced by a creditor for any type of debt other than a debt secured by a mortgage on immovable property.

Separately, the government is working on legislation to regulate cryptocurrencies, but no draft has been released yet. Crypto Tax: FAQ on Taxation of Crypto, Virtual Digital Assets in Works

Jaclyn Diaz

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