Section 115BBH | Tax on Crypto Currency (Virtual Digital Assets)

Section 115BBH a newly inserted section in Finance Bill 2022 and applicable from 1st April 2022. Any transfer of virtual digital assets on or after 1-4-2022 shall be taxable as per Section 115BBH.

Speculation in crypto currency is increasing day by day. One of such examples is Bitcoin, which creates a major value in the digital market. Government in order to reduce such transactions has imposed tax by introducing Section 115BBH.

Here we have explained in detail about Section 115BBH - Tax on CryptoCurrency (Virtual Digital Assets Taxation scheme):

 

What is Section 115BBH of Income Tax Act 1961?

Section 115BBH is a newly inserted section which provides information for taxation applicable on virtual digital assets.

In the budget 2022 government by introducing this section covers all the transactions of virtual digital assets (crypto currency) under tax provisions. Now 1st April 2022 onwards, transfer on virtual digital assets is taxable and you have to pay tax.

 

What is a virtual digital asset?

As per clause (47A) of section 2 of Income Tax Act virtual digital assets means:

• Any information or
• Code or
• Number or
• Token (not being Indian currency or any foreign currency)

And that is generated through cryptographic means or otherwise. In this process it creates a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherited value, or functions as a store of value or unit of account.

It also includes Non-fungible token that means such digital assets which are notified by the central government.

Virtual digital assets include crypto currencies and NFT’s (Non Fungible token). So the government put both these under the tax net. 

Example of crypto currency like Bitcoins (these also called fungible tokens)

Example of Non fungible tokens, like digital networks and real assets (real estate) or an art work

 

What is the tax rate on the transfer of virtual digital assets under Section 115BBH?

As per Section 115BBH if a person (assessee) earns any income from transfer of any virtual digital asset then such income is taxable at a flat rate of 30% and that Income is taxable under the head capital gain.

So it is to be noted that both short term capital gain and long term capital gain is taxable at the same flat rate i.e. 30%. Thereafter surcharge and cess will be added. 

Example

A bitcoin of amount Rs. 10 lakhs purchased on 01-01-2022 and sell it for 01-05-2022 for amount Rs. 15 lakhs then it is short term capital gain and is computed as for the below:- 

Particulars	Amount (Rs.)
Full value of consideration (-) Cost of acquisition	1500000 1000000
Short term capital gain	500000

 

This Rs.500000 is taxable under the head capital gain and same is taxable at 30% rate

Tax = Rs. 500000* 30%

= Rs. 150000

 

Point to be noted:

TDS will levied on transfer of virtual digital asset under section 194S at 1% of rate (on certain conditions) (please refer article 194S)

If a person received a virtual digital asset as a gift then it is taxable as per the provisions of Section 56 (2) (x).

If a person is trading in virtual digital assets like frequent transactions in virtual digital assets then that Income is regarded as his business income and not capital gain income, so this income is also taxed at 30% rate adding surcharge (if any) and cess.

If the period of holding of virtual digital assets is more than 36 months then it is long term capital gain otherwise it is short term.

 

Are expenses allowed to be deducted from sale value of cryptocurrency (virtual asset)? 

Treatment of expenses:-

While calculating the income from transfer of any virtual asset, no expense is allowed to be deducted except cost of acquisition.

Like in our earlier example if consideration received is Rs. 15 lakhs and cost of acquisition is Rs. 10 lakhs then cost of acquisition is allowed to be reduced from sale value (i.e. 15 lakhs) and tax will be calculated on 5 lakhs.

But other than cost of acquisition or other expense is not allowed to be deducted from sale value. So it is important to be noted that the following items you should ignore (not deducted) while calculating income from transfer of virtual digital assets:- 

• Any expenditure incurred in connection with transfer of virtual digital asset,
• Indexation benefit of cost of acquisition
• Cost of improvement
• Exemptions under section 54F
• No deduction under chapter VI-A

 

What is the treatment of set off and carry forward of losses for virtual digital assets under Section 115BBH?

As per Section 115BBH (2) (b) you are not allowed to set off loss from transfer of virtual digital assets against income computed under any other provisions. Also such loss is not allowed to be carried forward for succeeding years.

However, loss arising on a virtual digital asset is allowed to set off from the gains of another virtual digital asset. So, virtual digital asset loss is not allowed to set off from gain in any other heads.

 

Summary

Section 115BBH has been introduced to reduce the transaction of virtual digital assets. So the government introduces tax at 30% on gain on transfer of such assets. TDS is also deducted at 1% as per section194S. By not allowing expense deduction & set off and carry forward this section brings a lot of strict provisions.