Budget 2025: Taxation of cryptocurrency has become a crucial factor for investors in India, as the government enforces strict regulations on the sector. The upcoming Union Budget for the fiscal year 2025-26 has sparked excitement within the cryptocurrency industry.
The Income Tax Appellate Tribunal (ITAT) in Jodhpur has recently made a significant ruling that clarifies the tax treatment of cryptocurrencies in India. The decision, which categorizes cryptocurrencies as capital assets, has implications for how profits from cryptocurrency sales are taxed, particularly for transactions that took place prior to the enactment of specific regulations for Virtual Digital Assets (VDAs) in 2022.
The ITAT has determined that cryptocurrencies should be considered assets, and any profits arising from their sale should be categorized as capital gains as opposed to income from other sources. This classification is crucial as there was previously ambiguity surrounding the treatment of cryptocurrency profits, with no definitive guidance on whether they should fall under capital gains or the head of "income from other sources".
Stakeholders are optimistic about the potential reforms that may offer clear guidelines and tax relief for virtual digital assets (VDAs).
Taxation of cryptocurrencies
It is important to note that cryptocurrencies fall under the category of Virtual Digital Assets according to Section 2(47A) of the Income Tax Act, but they are not considered legal tender. Consequently, the Income Tax Department (ITD) has not yet provided specific guidelines for taxing crypto coins.
The taxation of Virtual Digital Assets (VDAs) is governed by relevant provisions in the Income Tax Act, specifically Section 115BBH and Section 194S. These provisions stipulate a flat 30% tax on profits from VDA sales and a 1% Tax Deducted at Source (TDS) on transactions.
In 2022, the Centre introduced a 30% tax on earnings from Virtual Digital Assets (VDAs), aligning them with profits from gambling and lotteries. Moreover, a 1% Tax Deducted at Source (TDS) was enforced on crypto transactions surpassing Rs 10,000. The purpose of these actions was to enhance transparency and responsibility within the rapidly growing crypto sector.
Since the implementation of the current crypto tax regime in 2022, there have been debates that have led industry experts to foresee potential changes aimed at fostering the growth and development of the sector.
What industry wants
The high tax rate and TDS have come under scrutiny for dampening trading activity on local platforms. Numerous users have opted to shift to foreign exchanges to avoid these taxes, resulting in decreased revenue for the Centre. Industry estimates suggest that the implementation of the 1% TDS has resulted in a potential loss of $420 million in government revenue due to the migration of Indian crypto traders to overseas platforms.
Moreover, the inability to offset losses against gains in VDA transactions has proven to be a significant obstacle for investors. Unlike traditional asset classes, where losses can be used to reduce tax liability, the current tax structure for cryptocurrencies does not allow for this, leading to higher effective taxes on investors.
Experts feel in order to prevent users from migrating to foreign exchanges, there are calls to broaden the scope of the TDS mandate to specifically encompass offshore platforms. This measure could help create a more fair market for domestic exchanges and promote improved tax compliance.
Besides, experts feel the Finance Ministry should consider lowering the tax on virtual digital assets (VDA) to less than 30% and reducing the TDS on transactions from 1% to 0.01%. Additionally, implementing a set-off and carry-forward provision for losses in VDA transactions is essential.
The Budget should reduce the tax on virtual digital assets (VDA) below 30% and cut the TDS on all transactions from 1% to 0.01%. These reforms are necessary to create a level playing field for crypto investors and traders. Lower taxes will also boost compliance and prevent investors from moving to exchanges abroad. India could lead the global Web3 and blockchain renaissance if a fair and friendly tax regime is put in place, Avinash Shekhar, CEO and Co-Founder, Pi42, told the Economic Times.