The sale of cryptocurrencies in India is now subject to a flat 30% tax as of April 1, 2022. A detailed explanation of how some people have begun to discover novel ways to lawfully avoid this tax is provided below.
Topics Included
- 30% Tax on Bitcoin and Other Crypto Sales
- 1% TDS on Bitcoin and other cryptocurrency sales
- GST Tax Levy Period for Bitcoin and Other Cryptocurrencies
- How to Reduce Tax on Bitcoin & Other Crypto Sales
Reduce Tax on the Sale of Bitcoin
30% Tax on Bitcoin and Other Crypto Sales
All cryptocurrencies, including Bitcoin, Ethereum, and other digital assets, as well as non-fiat currencies (NFTs), are included in the definition of virtual digital assets, which was established in Budget 2022.
Gains from all virtual digital assets are subject to a fixed rate of 30% tax. Hence, gains from cryptocurrencies like Bitcoin, Etherium, etc. are also subject to this rate. Additionally, income would be taxed under the heading “Other Sources” and not as capital gains.
The sale of any cryptocurrency may result in losses, and such losses may not be offset by profits from any other form of income, including business revenue, capital gains, etc. Additionally, it would not be possible to offset a loss from the sale of one cryptocurrency with a gain from the sale of another cryptocurrency. Even carrying over crypto losses to the following year would not be permitted.
For instance, I trade in bitcoins and make a profit of Rs. 5,00,000 in the month of May, but I lose Rs. 3 lakhs when I sell another bitcoin deal in the month of June. As a result, I only actually made Rs. 2 lakh.
However, my income will be counted as Rs. 5 Lakhs rather than Rs. 1 Lakh for income tax purposes, and a 30% Tax will be applied to that amount. The tax owed in this instance would be 30% of 5 Lakhs or Rs. 1.5 Lakhs. To reiterate, a loss on the sale of one cryptocurrency cannot even be offset by a gain on the sale of another.
Personally, I think this is really unjust. Cryptocurrency traders occasionally experience losses and occasionally get gains in their deals. After accounting for both gains and losses, the actual profit is what remains. Why are crypto traders not permitted to set off their income and gains but share market dealers are permitted to do so?
It is not possible to offset cryptocurrency losses with profits or other revenue. But profits from cryptocurrency can offset losses from other sources of income. Imagine, for instance, that I lose Rs. 2 lakh in my business and earn Rs. 5 lakh through cryptocurrency exchanges. My taxable income in this situation would only be Rs. 3 Lakhs and a 30% tax would be applied to that amount.
Reiterating, losses from the sale of cryptocurrencies cannot be offset, but losses from any other source of income may be offset with profits from cryptocurrencies.
1% TDS on Bitcoin and Other Crypto Transactions
From April 1, 2022, onward, 1% TDS, or tax deducted at source, will also be applied to the sale of any virtual digital assets, such as NFTs and cryptocurrencies. It would be necessary to deduct this 1% TDS under Section 194S from the Sale Price rather than the Capital Gain.
The individual would be able to claim credit for this 1% TDS that has already been taken out when submitting the ITR.
Many people traded in cryptocurrencies without paying taxes on their earnings. The government has instituted TDS on such transactions to guarantee that there is no tax avoidance. This will guarantee that the government has complete information on who has sold how much in digital assets.
Regardless of whether the cryptocurrency is sold at a profit or a loss, this TDS will still be necessary. Although this may prevent working capital, particularly for extremely busy dealers, it will also guarantee that the government has all the information and can simply crack down on tax evaders.
Time of Tax Levy
The aforementioned taxes would be assessed when an asset was sold rather than when money was taken out of a bank account. As a result, tax would still need to be paid in the year that the cryptocurrency was sold rather than the year that the money was withdrawn to the bank account if a person sold their cryptocurrency but did not withdraw the proceeds to their bank account.
Even if someone exchanged one cryptocurrency for another, this would still be regarded as a sale and a barter transaction. Despite the fact that INR has not been received in this instance because crypto has been sold, it would be seen as a case of sale.
Even if the cryptocurrency is sold on foreign exchange, the same rule would still be in effect.
Everyone who resides in India is subject to this regulation, although NRIs, those with entities outside of India, and anyone whose cryptocurrency is sold by foreign entities are exempt.
GST on Bitcoin
The Indian government is debating adding GST on cryptocurrency transactions. The idea of taxing cryptocurrency transactions with GST at 28% has been discussed for a number of years. This would be in addition to the existing 30% Tax.
However, the government has not yet imposed a 28% GST on cryptocurrency transactions.
How to Reduce Taxes on Crypto Sales in 2022
In India, there is an extremely onerous tax imposed on cryptocurrencies, NFTs, and other virtual digital assets. The tax regulations are much more strict because losses and costs cannot be offset.
Everyone who resides in India is subject to this rule. However, NRIs and businesses registered outside of India are exempt.
Many active Indian cryptocurrency dealers have started registering entities outside of India in tax havens like Dubai, where there are no taxes, in order to avoid paying such punitive taxes. They do business via their overseas firms, and no tax is levied in India.
Without the requirement to live in Dubai, entities in countries like Dubai may be founded in India. Many individuals who are avid cryptocurrency traders have set up businesses in Dubai while residing in India. Please see: How to Set Up an Entity from India in Dubai.
The Income Tax Act further states in Section 6 that even if the foreign corporation’s owners live in India, the Place of Effective Management Rules do not apply and the Indian government cannot charge tax on the foreign business unless its annual turnover is less than Rs. 50 crores.
Many people are using this Section to incorporate corporations outside of India in locations like Dubai, saving a substantial amount of taxes in the process. They are registering businesses outside of India not only to avoid paying taxes on their cryptocurrency revenue but also on any commercial income they may be receiving from other sources.
Although other tax havens like Malta, the Cayman Islands, the British Virgin Islands, Cyprus, the Bahamas, etc. are all suitable for this tax planning, Indians prefer to visit Dubai since it is the closest tax haven to their country.
Such organizations are typically established in Dubai’s free zones, which are exempt from taxes, as opposed to the mainland, where a 9% corporation tax will be imposed beginning in 2023.
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