FAQ on taxation of cryptocurrencies, virtual digital assets in works

The government is working on an FAQ on taxation of cryptocurrencies, which will give a nuanced clarification on the applicability of income tax and GST on virtual digital assets, an official said.

The set of Frequently Asked Questions (FAQ), which is being drafted by the Department of Economic Affairs (DEA), RBI and Revenue Department, would also be vetted by the law ministry, the official added.

"FAQ on taxation of cryptocurrency and virtual digital assets is in works. Although FAQs are for information purposes and do not have legal sanctity, law ministry's opinion is being sought to ensure that there is no loophole," the official told PTI.

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

The 2022-23 Budget has brought in clarity with regard to levy of income tax on crypto assets. From April 1, a 30 per cent income tax plus cess and surcharges will be levied on such transactions in the same manner as the tax law treats winnings from horse races or other speculative transactions.

The Budget 2022-23 also proposed a 1 per cent TDS (tax deducted at source) on payments towards virtual currencies beyond Rs 10,000 in a year and taxation of such gifts in the hands of the recipient.

The threshold limit for TDS would be Rs 50,000 a year for specified persons, which include individuals/HUFs who are required to get their accounts audited under the I-T Act.

The provisions related to 1 per cent TDS will come into effect from July 1, 2022, while the gains will be taxed effective April 1.

From the GST perspective, the FAQ is likely to provide clarity on whether cryptocurrency is goods or service.

Currently, 18 per cent Goods and Services Tax (GST) is levied only on service provided by crypto exchanges and it is categorised as financial services.

The GST law does not clearly mention classification of cryptocurrency. In the absence of a law on regulating such virtual digital currencies, the classification has to take into account whether the legal framework categorises it as 'actionable claim'.

An actionable claim is a claim which can be made by a creditor, for any type of debt other than a debt secured by mortgage of immovable property.

Separately, the government is working on a legislation to regulate cryptocurrencies, but no draft has yet been released publicly.