Income tax on cryptocurrency introduced: Investors may see a sell off in the coming weeks

Even as the government introduced income tax on digital assets, that would include cryptocurrencies and Non-Fungible Tokens (NFTs), this is set to spark a sell off from Indian investors, say industry trackers.

The finance minister on Tuesday introduced a 30% income tax on returns from digital currencies. This would mean that investors will have to cough up 30% tax on the returns they make from trading or investing in cryptocurrencies.

Experts say that the 30% tax would also not be allowed to be set off against any other losses or expenses. This is only going to increase the tax burden for cryptocurrency investors, who will have to shell out a third of their returns towards taxes.

The government has also plugged loopholes saying that there also be income tax if crypto assets are “gifted” by anyone. The recipient of such a gift will have to pay 30% tax.

“Interestingly it’s proposed to be taxed at a higher rate of 30 percent without any deduction of expenses other than cost. Further, set off of losses not permissible as speculative income and the same will be tracked as tax withholding too with one percent,” said Girish Vanwari, founder of tax advisory Transaction Square.

“Cryptocurrencies may not be taxed as capital gains and instead would be taxed as business income hence surcharge reduction to 15% would not apply,” said Amit Maheshwari, tax partner at tax consultancy firm AKM Global.

ET had first written on December 4 that the government was looking to add cryptocurrencies to tax law. “The government is looking to amend current income tax and disclosure norms in the upcoming budget to include terms such as cryptocurrency,” ET wrote on December 4.

The government had also sought opinion from senior tax advisors on whether the income earned from trading or investing in cryptocurrencies could be treated as business income as against capital gains from this year onwards, ET also wrote on January 20.

Up until now there was no clarity around the tax rate on cryptocurrency. This is mainly because there is no clarity as to whether crypto assets are currency, commodities or a service.

Many investors were also looking to treat it similar to equity and applying long term capital gains tax on the crypto assets.

The government clarification would mean that tax payers will have to not only disclose the income and assets they hold, they will also have to cough up tax on the income.