How To Calculate Tax on Crypto Donations?
Crypto taxation is a complex and evolving topic that affects individuals and businesses alike. It is one area that received less attention but has significant implications for crypto donations. Crypto donations are transfers of cryptocurrencies or tokens to charitable organisations or individuals for philanthropic purposes.
In India, crypto donations are not explicitly regulated by any law or authority because of their rarity, but they may have tax consequences for both the donor and the recipient. This article will overview the current legal and tax framework for crypto donations in India and highlight some challenges and opportunities for donors and recipients.
Understand The Concept of Crypto Donation
Cryptocurrency donation is a way of giving money or other digital assets to a person, organisation, or cause using a decentralised and encrypted system of transactions. Donors who donate cryptocurrency transfer a certain amount of digital assets, such as Ethereum, Bitcoin or other cryptocurrencies, to a recipient. This transfer is made as a gift or a contribution to a cause, organisation, non-profit, or charity.
Cryptocurrency donation has advantages over traditional donation forms, such as lower fees, faster processing, and more transparency. However, cryptocurrency donation also has challenges like volatility, security risks, and regulatory uncertainty. Therefore, before making a cryptocurrency donation, it is essential to research and understand the implications and risks involved.
Are Crypto Donations Eligible For Taxation in India?
According to the applicable crypto tax in India if a person donates cryptocurrency, it is treated as selling digital assets, and any profit earned from this sale is subject to taxation as capital gains. Capital gains from cryptocurrency refer to the profit from buying and selling virtual digital assets.
In a generic statement, this profit is calculated by subtracting the original purchase cost from the selling price. If the cryptocurrency’s value increases and it is sold for a higher price than the purchase price, the difference is treated as capital gains and is taxable by the government.
How Can You Determine The Tax On Your Crypto Donation?
To calculate the tax levied on your crypto donation, you need to follow the given steps:
1. Establish the COA:
COA, i.e., Cost of Acquisition, is the value or the sum at which you have initially bought the cryptocurrency.
2. Calculate the FMV:
Fair Market Value or FMV is the amount at which you have sold or donated the crypto to the respective organisation.
3. Determine the Capital Gain:
You can calculate your capital gain using the given formula:
Fair Market Value (FMV) – Cost of Acquisition (COA)
4. Estimate the Tax on Capital Gain:
Whatever amount you have determined as your capital gain is now subjected to a fair 30% tax rate.
Real-Life Scenario of Tax on Crypto Donation
Here is an example of how crypto tax is calculated in India:
Suppose someone donated 1 Bitcoin (BTC) on April 1, 2022, worth INR 30 lakh. On March 31, 2023, you sold that BTC for INR 40 lakh to convert it into cash.
- Your Cost of Acquisition becomes INR 30 Lakhs.
- Your Fair Market Value becomes INR 40 Lakhs.
Now, to determine Capital Gain, you need to use the above formula:
Fair Market Value (FMV) – Cost of Acquisition (COA)
(40,00,000 – 30,00,000 = 10,00,000)
- Thus, your total Capital Gain is INR 10 lakh.
According to the Indian government, crypto is taxed at 30% (including cess and surcharges).
- Therefore, you have to pay 30% tax on INR 10 lakh, which is INR 3 lakh.
Also, crypto is subject to 1% TDS (Tax Deducted at Source) if the crypto transfer is more than INR 50,000 (sometimes INR 10,000).
- Therefore, 1% TDS, which is 50,000, will be deducted from the BTC transfer.
So, after subtracting TDS from the total tax, you have to pay INR 2.5 Lakhs (3 – 0.5 = 2.5) as total tax (including cess and surcharges) to the Income Tax Department (ITD).
What Tax Clauses Are Applicable On Crypto Capital Gains?
The Financial Bill 2022 introduced a new scheme to allow the taxation of virtual digital assets such as cryptocurrencies in India. According to Section 115BBH of the bill, profits from trading cryptocurrencies on or after April 1, 2022, will be taxed at 30% (plus applicable surcharge and 4% cess). It is the same as India’s highest income tax bracket (excluding
surcharge and cess).
No deduction except the acquisition cost will be allowed while reporting income from the transfer of digital assets. Losses from digital assets cannot be set off against any other income.
A 1% TDS will also be imposed on payments for transferring crypto assets exceeding Rs 10,000 in a year. Gifts of crypto assets will also be taxed in the hands of the receiver. This amendment will take effect from April 1, 2023, and will apply to the assessment year 2023-24 and subsequent assessment years.
Applicable Limits on Crypto Donations
- When calculating income from cryptocurrency, only the acquisition cost can be deducted as an expense.
- You cannot use losses incurred from cryptocurrency trading to offset other sources of income, such as business or salary.
- Furthermore, any losses from cryptocurrency transactions cannot be carried forward to future years to offset future cryptocurrency income.
Crypto donations are a new and emerging area of philanthropic giving that is gaining popularity in India. However, crypto taxation is a complex and evolving topic that requires a thorough understanding of the legal and tax framework.
The introduction of Section 115BBH of the Financial Bill 2022 has brought virtual digital assets like cryptocurrencies under the ambit of taxation in India. It is important to keep in mind that losses from cryptocurrency transactions cannot be carried forward to future years to offset future cryptocurrency income.
As crypto donations become more prevalent, it is essential to stay updated on the evolving tax regulations and their implications for donors and recipients alike.