Consider the following when calculating the capital gain on the transfer of a Virtual Digital Asset:
- Capital Gain = Full Consideration (Selling Price) – Acquisition Cost (Purchase Price)
- Taxpayers cannot claim transfer expenses, which are expenses incurred during the transfer process.
- The cost of improvement cannot be claimed as an expense by the taxpayer.
- There is no indexation benefit available.
- Sections 54 to 54F do not allow taxpayers to claim a capital gain exemption.
- The taxpayer cannot deduct such income under Chapter VI-A.
Taxation of Cryptocurrency – Treatment of Transfer Loss
The restrictions on the treatment of set-off and carry forward of losses on the transfer of cryptocurrency, NFTs, and other VDAs are as follows:
- The taxpayer cannot deduct the loss from one VDA transfer from the profit from another VDA transfer.
- The taxpayer cannot deduct the loss from the transfer of VDA from any other income.
- The loss on the transfer of VDA cannot be carried forward to future years by the taxpayer.
- The taxpayer cannot deduct a loss from any other source of income from the profit on the transfer of VDA.
TDS on cryptocurrency transfers and other VDA
Along with the provision for a 30% crypto tax, the government also introduced Section 194S for the deduction of TDS on cryptocurrency and other VDA transfers. Section 194S requires the person responsible for making the payment on a VDA transfer to deduct TDS at the rate of 1% if the total transfer amount during the fiscal year exceeds INR 10,000. In the case of specified individuals, the limit is INR 50,000.
Notice to Crypto Traders Regarding Income Tax
The Income Tax Department had issued notices to a number of taxpayers for failing to report crypto trading in previous years’ ITRs. When a trader joins a cryptocurrency exchange, he must go through the e-KYC process. The income tax department has data on all your crypto trades by using PAN, Aadhaar, or linked bank accounts from compliances performed by crypto exchanges.
The ITD issued tax notices for cryptocurrency trading to taxpayers in accordance with Section 148A of the Income Tax Act. This notice was to conduct an investigation to provide an opportunity before issuing a notice for income escapement under Section 148. The notice mentions the amount of crypto trading in a fiscal year and whether or not the taxpayer reported it as Capital Gains in the relevant year’s ITR. It gives the taxpayer the opportunity to respond via email with an explanation.
The taxpayer must respond to the notice within the time frame specified. You can respond to the email address specified in the notice. You can also submit an online response with the justification and relevant proofs through your account on the income tax website under e-proceedings.
GST on cryptocurrencies, NFTs, and VDAs
Budget 2022 included a provision for income taxation of cryptocurrency, NFT, and VDA. However, there has been no clarification regarding the application of GST to cryptocurrency, NFT, and VDA. A virtual digital asset, according to our interpretation of the GST Act, falls under the definition of goods. As a result, the sale of cryptocurrency and other digital assets is subject to GST.
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