When crypto assets received as gift are tax exempt in your hands

As per the Finance Minister’s Budget 2022 speech, gifting of virtual digital assets such as crypto assets, Non-fungible tokens (NFTs) etc, will be taxable in the hands of the recipient. As per the Budget speech, “Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient.”

However, under Income-tax Act, 1961, gifts made to specified relatives or made on specific occasions are exempted from tax irrespective of the amount of gift. For instance, gifts received from parents or from siblings etc. exempted from tax. Similarly, gifts received on the occasion of marriage, via a will or inheritance or in contemplation of death of the donor are also exempted from income tax, irrespective of the amount. However, gift received from a friend exceeding Rs 50,000 on the occasion of birthday will be taxable in the individual’s hands.

Now the question is whether the same gift taxation rules as mentioned in the Income-tax Act will be applicable to virtual digital assets also. As per tax experts, the definition of ‘property’ is to be expanded under the Income-tax Act to include virtual digital assets for the taxation of gifts as per the Budget 2022 proposal.

Chartered Accountant Naveen Wadhwa, DGM, says “Income-tax Act levies tax on gift received in cash, immovable property or specified movable assets, like shares, jewellery, painting, etc. The Budget 2022 proposes to include virtual digital assets within the scope of moveable assets. Thus, gifting of any virtual digital asset (like Bitcoin or NFT) will be taxable if the value of annual gifts exceeds Rs. 50,000. However, no tax will be levied if the virtual digital assets are received as a gift from specified relatives (parents, siblings, children, grandparents, grandchildren, parents-in-law, etc.) or on the occasion of marriage. The gifts received by a bride or bridegroom on the occasion of marriage are tax free. The parents of the bride or bridegroom cannot take the benefit of exemption.”

Concurring with the view, L Badri Narayanan, Executive Partner, Lakshmikumaran & Sridharan Attorneys says, “The amendment proposed in Finance Bill 2022 clarifies that gift of virtual digital assets will be subject to tax in the hands of recipient. The Budget has made a clarification through an explanation stating that ‘property’ shall also include virtual digital assets for the purpose of the given clause. Additionally, no changes were made in the existing provisions which provides exemptions towards non-applicability of section 56 on gifts of property between relatives, receipt of property under a will or on marriage, and many other situations specified in proviso to section 56(2)(x)(c). The plain reading of the current amendment seems to suggest that ambit of crypto tax doesn’t extend to gift between relatives and is hence, tax-free, as it is akin to transferring money between relatives. However, the investors may wait for clarity from the Central Board on whether specified exemptions apply to crypto gifting as well.”

Further, clarity is needed regarding the calculation of the taxable value of crypto assets exceeding Rs 50,000 received from non-specified relatives. “Gift of virtual digital assets from relatives is not taxable in the hands of the recipient. However, virtual digital assets in excess of Rs 50,000 from non-relatives is taxable. The taxable value could be the difference between the amount, if any, paid by the recipient and the fair market value of the virtual digital assets. Clarity is awaited on valuation of virtual digital assets,” says Sudhakar Sethuraman, Partner, Deloitte India.

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