The Theory of Taxation of Cryptocurrencies in India

Any virtual or digital currency that uses encryption for transactions is referred to as a cryptocurrency. Cryptocurrencies employ a decentralized mechanism to track transactions and create new units rather than having a distinct central issuing or regulating authority. Cryptocurrency examples include Bitcoin, Ethereum, Litecoin, Dogecoin, and more. Cryptocurrencies can either be mined, which is the process of adding transactions to the blockchain and verifying them, or they can be traded between two parties, just like shares and commodities are traded. Various nations have different perspectives on whether to treat cryptocurrencies as a form of money or an asset, and this has an impact on taxes as well.

The Indian tax system and the mechanism of income set-off.

The Income Tax Act of 1961 defines “income” in a way that is inclusive in order to broaden the scope of who can be taxed and how much they can be taxed. Certain income is also exempt under the Income Tax Act of 1961, but only if it is specifically excluded; otherwise, it would be classified under one of the income heads and the assessee will be required to pay Income Tax on Crypto India on it. For instance, the Income Tax Act expressly exempted income from agriculture, although it does not do so for income from criminal enterprises like drug trading.

Prior to the Finance Bill, 2022, a person who dealt in cryptocurrencies for the purpose of investment paid taxes on their earnings under the headings “Income from Capital Gains” or “Income from Other Sources”; a person who traded cryptocurrencies paid taxes under the heading “Income from Business/Profession.” Setting off income refers to the net adjustments made while calculating an assessee’s income under the Income Tax Act of 1961’s several heads of income.

Set off is available both intra-head and between-heads of income (i.e., between various heads) (i.e. within the same head). Losses under the heading “Income from House Property” can be offset against the heading “Income from Other Sources,” for instance, but losses under the heading “Income from Capital Gain”—such as long-term capital losses—can only be offset against long-term capital gains.

The government intends to tax gains made on “Virtual Digital Assets” at a rate of 30% of the net gain so made plus the cess and a surcharge for a threshold amount, according to the announcement made by the honorable Union Finance Minister Smt. Nirmala Sitharaman while reading out the proposals of the Union Budget 2022–23 in the Parliament. She additionally suggested that inter-person transactions involving these assets be subject to TDS (Tax Deducted at Source) at a rate of 1% over the threshold limit that the government would announce.

Additionally, it was stated that losses from virtual digital assets cannot be offset by gains from any other sources of income. This means that if an assessee experiences a loss from a specific virtual digital asset, they are unable to offset that loss against any other gains from any other sources of income. Additionally, the person will not be allowed to transfer the losses from virtual digital assets over to future fiscal years. Additionally, it was declared that beginning with the following fiscal year, a distinct ITR (Income Tax Return) column will be used to disclose virtual digital assets.

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