The Indian government introduced a taxation framework for cryptocurrencies and other Virtual Digital Assets (VDAs) in the 2022 Union Budget. However, the stringent tax obligations that accompanied this framework have sparked widespread debate among experts.

The framework defines VDAs broadly, encompassing cryptocurrencies, Non-Fungible Tokens (NFTs), and digital tokens.

The key elements of the taxation regime are as follows:

Flat 30% tax on gains:

Gains from the sale of crypto assets are subject to a flat 30% tax, regardless of the individual’s income tax slab.

This rate is significantly higher than the taxation of many other asset classes, such as equities.

1% tax deducted at source (TDS):

Effective from July 1, 2022, a 1% TDS is applicable on all crypto transactions.

The threshold for TDS is ₹50,000 annually for specified individuals (e.g., high-net-worth individuals and businesses) and ₹10,000 for others.

This applies to transactions involving selling, trading, or spending cryptocurrencies.

Specific scenarios:

Gifts and airdrops: Crypto assets received as gifts or through airdrops are taxable at their fair market value, with exemptions for family gifts or amounts under ₹50,000 annually.

Crypto mining: Income from mining activities is taxed as additional income based on individual tax slab rates, making it distinct from gains derived from trading.

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Crypto-to-crypto trades: Transactions involving the exchange of one cryptocurrency for another are taxable at the flat 30% rate. Additionally, both parties involved must deduct the 1% TDS.

No loss offsetting: The framework prohibits the offsetting or carrying forward of losses. For instance, if an investor incurs a loss on one crypto transaction and a gain on another, they cannot offset the loss against the gain to reduce their tax liability.

Industry concerns and recommendations

The crypto industry has highlighted the challenges posed by this taxation structure, including its impact on compliance, market activity, and innovation.

“We have been advocating for the reduction in the Tax Deducted at Source (TDS) on VDA transactions from the current 1% to 0.01%. This adjustment would significantly ease compliance challenges and promote market transparency while ensuring the tracking and tracing of transactions and boosting tax revenues,” explained Balaji Srihari, Vice President, CoinSwitch.

Additionally, Srihari recommends raising the TDS applicability threshold from ₹10,000/50,000 to ₹5,00,000.

“This would protect small investors and traders from undue tax burdens, ensuring fair treatment across the board,” he added.

Aligning VDA taxation with other asset classes by allowing the offsetting and carry-forward of losses under capital gains provisions is another key industry demand.

“This would help establish parity and create an environment for innovation,” Srihari noted.