In the previous Budget 2022, the finance minister outlined the rules for taxing these types of assets, including provisions for taxing gifts of cryptocurrency, NFTs, and other virtual digital assets.
But when you talk about gifting or transferring certain assets to another person or account, are they taxable by nature?
Let’s explore the horizons of crypto taxation on crypto gifting.
What is considered a crypto gift?
Crypto gifts refer to the act of transferring cryptocurrency from one individual to another as a present, with no anticipation of receiving anything of equal value in return.
According to the Income Tax regulations, generic gifts can be categorized as follows:
- Monetary gifts: Any money received as a gift.
- Movable property gifts: Specified movable assets received as a gift, or received at a lower price (less than its market value).
- Immovable property gifts: Real estate received as a gift without any consideration, or acquired at a reduced price.
How is crypto gifted?
If you’re interested in gifting cryptocurrency, there are a few different ways to do it. You can use gift cards from a cryptocurrency exchange, a crypto paper wallet, or even a crypto token.
- Gift Cards: If you’re a crypto trader or investor, you can simply buy a gift card from the cryptocurrency exchange and give it to someone.
- Crypto Paper Wallet: Another option is a crypto paper wallet, which is essentially a piece of paper with a private key and bitcoin address. This is a unique way to gift cryptocurrency.
- Crypto Tokens: Lastly, you can also gift a crypto token, which is a virtual currency token or a specific amount of cryptocurrency.
Tax Implications for Receiving a Crypto Gift Transfer
- Gifts with a value of up to INR 50,000 are tax-exempt.
- Gifts from relatives with a value exceeding INR 50,000 are tax-exempt.
- Gifts from non-relatives with a value exceeding INR 50,000 are taxable.
- VDA gifts received on special occasions, through inheritance or a will, or in contemplation of death are exempt from tax.
Let’s take a look at this example:
For example, if you are given Rs. 20,000 in crypto tokens by your friend as a gift, you will not have to pay any taxes on it at that time. However, if a few months later, you receive another gift of Rs. 35,000 as tokens from another friend, and then closer to Diwali, another gift of Rs. 5,000 from another friend, the total gifts received (Rs. 60,000), which exceeds the Rs. 50,000 limits. This amount will be subject to taxation.
Tax Implications for the Giver of a Crypto Gift
According to Section 2(14) of the Income Tax Act, virtual digital assets, including cryptocurrencies, NFTs, and other virtual assets, are classified as Capital Assets.
Normally, when you sell a Capital Asset, you have to pay taxes on it. But the law says that gifts are not considered a sale. So, if you give someone a cryptocurrency or an NFT as a gift, you don’t have to pay taxes on it.
Taxation of Employer-Given Gifts
- Taxable Benefit: Any taxable benefit given by an employer, such as gifts during festive seasons, will be considered taxable income for the recipient.
- Performance Bonuses: Gifts received as awards or on special occasions, such as performance bonuses, are also taxed.
But, there is good news too – You or a family member can receive gifts in cash or kind from the employer with a tax exemption of up to Rs 5,000.
Tax on the Sale of a Crypto Gift
- The sale of a crypto gift is not taxed in the hands of the giver.
- Income Clubbing: If the recipient of the gift is a spouse or minor child, any income generated from the asset is clubbed with the income of the giver.
Calculation of Tax Liability on Gifted Crypto
- The holding period of the gifted crypto is calculated from the date of purchase by the previous owner to the date of sale by the recipient.
- Importance of considering purchase date, purchase value, sale date, and sale value to calculate tax liability.
- The tax rate on the sale of cryptocurrency: A 30% tax rate is implied without claiming deductions for the cost of improvement, or transfer expenses.
Key points to consider for calculating the tax on gifted cryptocurrency
- Holding Period – Calculate the length of time the virtual digital asset (VDA) has been held from the date of purchase by the previous owner (i.e. the giver of the gift) to the date of sale by the receiver.
- Purchase Date – The date of purchase by the previous owner (i.e. the giver of the gift).
- Purchase Value – The cost of the purchase by the previous owner (i.e. the giver of the gift).
- Sale Date – The date of sale by the receiver of the gift.
- Sale Value – The amount received from the sale by the receiver of the gift.
- Tax Liability – The tax rate on the sale of cryptocurrency is 30% without deductions for the cost of improvement, or transfer expenses.
As the world of cryptocurrency continues to evolve and expand, so too does the complexity of its taxation.
However, tax doesn’t always have to be difficult.
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