The 2022 Union Budget does not cover other types of income such as strike, mining, lending, borrowing, airdrops, forks, wallet transfers, P2P transfers, gaming, endowments, donations, etc.

By Archit Gupta

The government of India introduced the tax implications for cryptocurrency for the first time in the Union Budget 2022, while the US Internal Revenue Service (IRS) first covered cryptocurrencies in 2014. Let’s take a look at the differences in the income tax treatment of cryptocurrencies from both countries.

Classification of crypto assets

In Budget 2022, the government has classified crypto assets as ‘virtual digital assets’. Although they are defined as assets, virtual digital assets are not treated like any other asset. The new income tax provision has been introduced for the taxation of virtual digital assets, which stipulates that 30% tax must be paid on the profits made from the transfer of crypto assets. However, no deduction may be adjusted from the sale price of the asset, other than the acquisition price.

However, in the US, cryptocurrencies are treated as capital goods. So when a person transfers cryptocurrency for a profit, he/she is subject to tax depending on whether the assets are long-term crypto-assets or short-term crypto-assets. US law states that assets sold after one year of purchase are classified as long-term assets. Long-term assets are subject to lower tax rates. But if the assets are sold within a year of purchase, they are classified as short-term capital goods. Since India’s tax law does not treat virtual digital assets as capital assets, crypto investors are not eligible for indexation benefits if the assets are held for long term and face the full 30% tax rate regardless of holding period.

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Furthermore, US income tax law allows to claim the losses of crypto assets and offset them against other sources of income. In addition, if a loss is not corrected, it can be carried forward to offset against future investment gains. Similar treatment is given for losses on the sale of capital goods in the Indian Income Tax Act. If there is a loss on the sale of capital goods, this can be set off against the profit on the sale of capital goods under certain conditions. And for any loss that has not been adjusted, it can be carried forward to eight subsequent years to be offset against future capital gains. But such an advantage is not available to crypto investors if they lose out on the sale of virtual digital assets. The treatment of gains or losses from virtual digital assets in the Indian Income Tax Act is similar to income from gambling, horse racing and lottery winnings. Also for games of chance and lottery winnings, income is taxed at a flat rate of 30% without any deductions, and in case of loss set-off against other income is not allowed.

Other tax rules

The budget has also given buyers the option to deduct 1% TDS on the transfer of virtual digital assets if the resale value is above a certain limit. The budget states that the transferor is responsible to deduct and deposit the TDS amount before releasing the consideration. However, there is still ambiguity about the compliance part as buyers will not have all the details from the seller if the transaction is made through crypto exchanges.

Furthermore, the gift received as crypto-assets is taxable in the hands of the beneficiary. The definition of specified movable assets is extended to include virtual digital assets. Therefore, the gifts received are taxable if the fair market value exceeds the threshold determined by law. Also, the simple reading of the budget amendment shows that the gift received from relatives or received on certain occasions is exempt from tax.

The US tax law does not require withholding tax at the time of payment of the consideration for the crypto-asset, and also receiving cryptocurrency as a gift is a non-taxable event for the recipient (done). The recipient does not have to pay tax or declare it in his tax return. However, at the time such gift is sold in the future, the recipient will have to pay capital gains tax. But the person who sends a gift must report the same if the value of the gifted crypto-assets exceeds a certain specified limit.

Receive Crypto Assets as Payments in the Business Transactions

Under US law, if goods or services are purchased using crypto-assets, such transactions are considered exchanging crypto-assets for goods or services. The taxpayer is required to pay capital gains tax if the value of such assets exceeds the price originally paid for them.

If the crypto-asset is received as payment for a business transaction, the fair market value at the date and time of receipt of such crypto-assets will be treated as income and taxable at regular tax rates.

However, in the 2022 Union budget, the government has not clearly defined the situation where crypto is accepted instead of currency. The government has clarified that virtual digital assets are not currencies. However, the term ‘transfer’ is not defined for virtual digital assets, but is very well defined for asset values ​​in the Income Tax Act. The law should address what “transfer” means and whether it relates to transactions involving the purchase of goods or services using cryptos. However, if the law clarifies that such transactions fall under the term “transfer”, then the TDS provision applies here, i.e. a person transferring crypto is required to withhold tax at source (TDS) because a transfer has taken place. . Such an event will be a tax event for the one transferring crypto.

In addition, there is no clarity on how the companies will report earnings for payment via crypto. The companies may be required to report revenue for the value (FMV) of crypto that is accepted in return for providing goods and services. Once the company sells or transfers these cryptos in any way, there will be another transfer of crypto and may have to pay tax on the transfer. The government has not made it clear how one should value the crypto assets received as payment in business.

Tax Implications for Defi or Other Crypto Use Cases

The 2022 Union Budget does not cover other types of income such as strike, mining, lending, borrowing, airdrops, forks, wallet transfers, P2P transfers, gaming, endowments, donations, etc.

However, under US tax rules, if you earn crypto assets by mining them or receiving them as promotion or payment for goods or services, this counts as your normal taxable income. Tax is due on the full fair market value of the crypto on the day it is received, at your normal income tax rate.

The author is founder and CEO, Clear (formerly ClearTax).

This post Cryptocurrency Tax: India vs. US Crypto Tax Rules Compared

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