Crypto Tax in India: A Detailed Study on Cryptocurrency Taxes

In layman’s terms, cryptocurrency is a digital medium of exchange. Similar to other currencies cryptocurrency is designed to buy goods and services. Unlike others, this is somewhat controversial because it is decentralized. In simple terms, cryptocurrency operates without any bank, financial institution, or central authorities. According to the 2022 Budget government of India, Crypto tax is mandatory for Institutions and traders.

In today’s world, more than 1,500 digital currencies are available to buy or sell in India. Some examples are Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, and Matic, etc.

Cryptocurrency: Currency or Asset

Indian government added section 2(47A) to the income tax act, to define Crypto and NFT or ‘non-fungible tokens’ as “Digital assets”. That definition includes any code, number, or token generated through cryptographic techniques to verify the transfer of funds. Gift cards or vouchers are not included in VDA (Virtual Digital Asset).

Crypto Tax in India?

Profit gains from cryptocurrency are taxable. According to the 2022 Budget government of India clarified its official Stance on cryptocurrencies and other VDAs.

Latest Amendment

The latest amendment for the fiscal year 2023-24 of the Income Tax Return includes Schedule Virtual Digital Asset (VDA) to report gains from cryptocurrencies, NFT, and other VDAs.

The last date to file an Income Tax Return (ITR) for fiscal year 2023-24 is July 31st, 2024. The last date for filing, is December 31st, 2024.

Introduction of Crypto Taxation

The government of India introduced The Crypto Taxation in the 2022 budget. Here we have discussed the outcome of the Union Budget 2022.

• The Government of India defines crypto assets as “Virtual Digital Assets” Income from the VDA like crypto and NFT transfer will be taxed at 30%.
• No deduction will be allowed while filing income from the transfer of digital assets, except the cost of acquisition.
• You cannot set off loss from VDAs against any other income.
• Recipients of any VDA as a gift are liable to pay income tax.
• Losses suffered from one virtual digital currency cannot be set forth against any other income from another digital currency.
• As per the government, 1% TDS (Tax Deducted at Source) will be applied on all sell transactions of Virtual Digital Assets (VDA) including crypto and NFT from 1st July 2022.

How Cryptocurrencies Taxed in India

Cryptocurrencies are defined as Virtual Digital assets by the government of India. These are subject to taxation.

• According to section 115BBH, pay 30% (plus 4% cess) on any profit made from cryptocurrency trading as Crypto tax.
• Section 194S imposes 1% TDS (Tax Deducted at Source) on transactions of crypto assets exceeding 50,000 (rupees 10,000 for certain cases) rupees in the same financial year, from July 01, 2022.
• Privet or commercial investors who transfer digital assets during that particular year are eligible to pay crypto tax.
• For short-term and long–term gains the tax rate stays the same. This is applicable to all types of income by the investor.

Tax Highlights

• As per section 115BBH, a 30% tax on digital income will be applicable from April 1st, 2022.
• As per section 194S, 1% TDS on the transaction of VDA will be applicable from July 1st, 2022.
• No deduction is allowed. Only the cost of acquisition is allowed.
• Profit should be reported under schedule Virtual Digital Assets in the Income Tax Return.

Liable Cryptocurrencies

You will be required to pay 30% Crypto tax if you are associated with any transaction following:

• Purchase goods or services with cryptocurrencies.
• Exchange cryptocurrencies for other cryptocurrencies.
• Mine Cryptocurrency.
• Trade cryptocurrency with fiat currency like INR.
• Receive crypto as a gift.
• Receive cryptocurrency as payment.
• Receive airdrops.
• Draw salary in cryptocurrency.
• Buy stake and earn benefits.

How to Calculate Crypto tax

When you have a large amount of transactions in different exchanges and wallets, the calculation of tax on crypto will be quite complex. To manage and integrate these transactions you need to apply crypto bookkeeping software. With this, you can generate reports like holding reports, Tax reports, and portfolio valuations

• Bringing in all transactions like deposits, trades, withdrawals, etc.
• The bookkeeping software can recognize transactions.
• Need to verify pending entries for classification.
• Closing balance as per actual holdings verification.  

TDS on Crypto Transaction

Crypto traders and investors carry out transactions by deducting a certain percentage at the source. Tax Deducted at Source (TDS) aims to tax those investors and traders. A buyer must subtract the TDS amount and forward it to the central government. Only the balance amount will be paid to the provider. The TDS rate for crypto is 1% in India. From July 01, 2022, the receiver of goods or services will be responsible for deducting TDS while making payment to the provider for the transfer of Virtual Digital Assets like Crypto and NFT. If the transaction takes place on an Indian exchange, TDS will be deducted automatically. However, Individual traders on foreign exchange need to deduct TDS and file returns manually.

• Peer-to-peer Transactions: The receiver is responsible for deducting TDS and filing forms 26QE or 26Q.
• Crypto-to-Crypto Transactions: Both receiver and provider will pay TDS at 1% as Crypto tax
• Non-Applicability of 194S TDS on VDA:  According to Section 194S TDS is applicable at the time of purchase of VDA from an Indian Tax Resident only. If you are a trader working with an International exchange, or a decentralized Crypto Exchange, you have to interact with a non-resident. Only then Section 194S is not applicable.

Airdrops

The process of distributing cryptocurrency directly to a specific wallet address is called airdrops. Airdrops are done to promote the token and increase fluidity in the early stages of a new currency. Airdrops are free generally. Crypto airdrops are taxed at 30%.

On what Amount Will the Airdrop be Taxed?

Receiving cryptocurrency: As per Crypto Tax rate under section 11UA, airdrop will be taxed on the value. Tax will be imposed at 30% on transacted capital gains.

Sell or spend: If you sell, spend, or swap those crypto later, a 30% tax will be imposed on the profit.

What is Crypto Mining?

Mining is a process that Blockchain networks use to finalize transactions. With powerful computers or mining hardware. These transactions are finalized by a group of computers, called miners. Miners solve complex mathematical puzzles. The first to solve the puzzle ultimately wins the reward. Rewards vary on the network.

On what Amount Will the Crypto Mining be Taxed?

Receiving cryptocurrency: As per section 11UA, mining will be taxed on the value. Tax will be imposed at 30% on value.

Sell or spend: If you sell, spend, or swap those crypto later, a 30% tax will be imposed on the profit.

Tax on Crypto Staking/ Forging

Cryptocurrency forging refers to the process of generating new blocks in the blockchain. By using consensus mechanisms for blockchains in exchange for rewards in the form of newly generated cryptocurrencies and commission fees. If you stake cryptocurrency, you have to pay taxes on your earnings. The amount you earn from staking will be taxed at 30%. Additionally, you will be liable to pay a 30% Capital Gains Tax when you sell your crypto asset.

In general, transferring your coins to a wallet is tax-free. Additionally, moving assets between wallets is tax-free too.

Tax on Crypto Gift

Cryptocurrencies can be gifted through gift cards, crypto tokens, or, crypto paper wallets. In Budget 2022, VDAs were included within movable properties. That’s why, crypto gifts received will be taxed as ‘income from other sources’ at regular slab rates if the total value of gifts is more than 50,000 rupees.

Cryptocurrencies received as gifts from relatives will be tax-free. Gifts you receive on special occasions, from inheritance, marriage, etc. are also exempt from taxes.

Loss from Cryptocurrency

As per Crypto tax rate under Section 115BBH, losses suffered in crypto cannot be canceled out against any income, including profit from cryptocurrency. A crypto investor cannot cancel out the previous year's losses from a crypto asset while filing an ITR this year.

Indian investors in cryptocurrency do not have any permission to claim expenses related to their crypto activities, except for the acquisition cost.

Discloser of crypto Assets in Asset and Liabilities

Ministry of Corporate Affairs (MCA) has made it compulsory to report profits and losses in virtual currencies Also, the value of cryptocurrency is as per the balance sheet date.  There are some changes in schedule III of the Companies Act starting from 1 April 2021.

This mandate is only for companies, not for individual taxpayers. However, reporting and paying taxes on the gains of cryptocurrency is a must for all.

For Individuals, currently, there is no specific field for disclosure of your Crypto holdings.

Summary of Crypto Transactions and the Applicable Rate

Buying crypto: 1% Crypto tax Deducted as TDS by the exchange. (Exempt international & P2P trades)

Trading crypto for crypto: 30% tax on any gains.

Selling crypto: 30% tax on any capital gains.

Trading crypto for crypto: 30% tax on any gain

Airdrops of crypto: Considered as income at your applicable tax rate; 30% tax if later sold.

Hard forks: Income Tax at your applicable tax rate upon receipt; 30% tax if later sold.

Staking rewards:  Income Tax at your individual tax rate; 30% tax if later sold.

Mining rewards: Income Tax at your individual tax rate; 30% tax if later sold.

Holding crypto: Tax-free, applicable capital gains tax upon disposal.

Moving crypto: Tax-free, proper documentation for audit.

Gifts of crypto: The recipient will be subject to tax; exemptions are for gifts from close family.

In conclusion, Indian government added section 2(47A) to the income tax act as per Crypto Tax to define Crypto and NFT or ‘non-fungible tokens’ as “Digital assets”. Income from the VDA like crypto and NFT transfer will be taxed at 30%. The TDS rate for crypto is 1% in India. From July 01, 2022. Despite the tax, Investing on cryptocurrencies are growing India. Investment in Cryptocurrencies are subject to market risks, read all the related documents carefully before investing. To invest in a brighter tomorrow and learn more about Crypto tax in India: taxation of cryptocurrency visit our website Online Legal India.