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Cryptocurrencies, NFTs as ESOPs to be considered as gifts, attract 30% tax

05 August 20225 mins read by Angel One
Cryptocurrencies, NFTs as ESOPs to be considered as gifts, attract 30% tax
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As proposed by Finance Minister Nirmala Sitharaman in her Budget 2022-23 speech, virtual digital assets (VDA) shall be taxed at a flat rate of 30%. This gave confidence to traders in cryptocurrency and other virtual digital assets about its recognition in India. Since the government is considering taxation of these assets, the banning of cryptos is not on the radar.

Along with that, the Finance Minister also added that the virtual digital assets received as gifts shall also be taxed as per the new rate in the hands of the person receiving such gift. With that under consideration, the question arises, will the cryptocurrencies received by employees of crypto exchanges as esops be considered as gifts? If yes, then will they attract a flat 30% rate of tax?

What are ESOPs?

Employee Stock Ownership/Options Plan commonly known as esops is a kind of compensation to the employee over and adobe the basic pay salary. Under this plan, the employees are offered the equity shares of the company at a very nominal price or sometimes at no cost at all. The employees can encash these shares later at a predetermined date and a predetermined price.

The benefits of esops include increased compensation to employees’ efforts, better-expected productivity from the employees, as it serves as a good tool to attract talent in the company. This also helps the companies in retaining their employees.

Esops by Crypto Exchanges

Many crypto exchanges have started offering their tokens as part of their employee incentive programs. This method of payment is likely to attract the same tax at the rate of 30%. The employees will be required to pay the tax on the same even if such assets are not sold during the current year.

Taxation in the hand of Employees

In the case of regular esops, the tax is levied in the hands of employees only after they exercise their stock option plans, meaning, they need to pay tax once they sell the shares received under the ESOP. But in the case of crypto esops, the employees will be required to pay tax on receipt of virtual digital assets like cryptocurrencies or Non-Fungible Tokens (NFTs).

Since this tax of 30% will be computed in the financial year in which the VDA is received, the employee will end up paying more tax if the price of VDA falls later at the time of sale. There is no such provision as of now to compensate for a situation like this if it arises for the employees.

Fair Value of Virtual Digital Assets

The main problem in this situation is the calculation of the fair value of virtual digital assets. Since special transactions such as gifts and esops are not carried out through the exchange, its valuation becomes difficult. The proposed rules do not give the tax department the authority to enforce rules regarding the taxation of virtual assets.

Since the tax will be charged based on the value of the VDA, the primary question here is what will be considered as the base value for computing 30% tax? Should the fair value be considered or the current market price of the assets be taken into account? The valuation of cryptocurrencies is complicated as they are traded on different exchanges at different prices.

In the case of NFTs, the valuation is often ambiguous.


What is NFT?

NFT stands for Non-Fungible Tokens. They are cryptographic assets that can be used on a blockchain. But unlike cryptocurrencies, the non-fungible tokens cannot be traded uniformly. Non-fungible tokens are digital tokens that are not identical to each other but can be used for commercial transactions.

How is ‘gift’ defined under the ambit of the Income Tax Act?

As per the income tax act, gifts are the transfer of an existing immovable or movable property or asset without any consideration to its worth. Since a gift does not have the characteristics of income, it cannot be considered as an inheritance. Generally, gifts were not subject to income tax. However, some individuals used these loopholes to launder money. Therefore, the income tax act has subjected certain gifts to taxation.

What is fair value?

Fair value is the price that the buyer and seller agree upon when it comes to selling an asset. A fair value is computed by the market for securities. It shows the approximate worth of the assets and liabilities. Prime importance is given to the determination of fair value since many provisions in the Income Tax Act require computation of tax based on the fair value of the asset.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.

Disclaimer: Angel One Limited does not endorse investment and trade in crypto currencies. This article is only for education and information purposes. Discuss with your investment advisor before making such risky calls.

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