Everything You Need to Know About Cryptocurrency Taxation in India

Cryptocurrency - Taxation - Cryptocurrency Taxation in India - Everything You Need to Know About Cryptocurrency - crypto tax - crypto tax details - Taxscan

Virtual Digital Assets(VDAs) and Cryptocurrencies – Know the Differences

A Virtual Digital Asset (VDA) is any digital holding that has been encrypted on the blockchain, enabling anyone to confirm its authenticity and determine who owns it.

Cryptocurrencies are a type of such digital assets, which can be used to pay for goods and services, in online marketplaces. Crypto-Traders use technical and fundamental analysis to find repeatable patterns in the market to bag huge amounts of profits. However, high volatility and capital-at–very high-risk is an innate risk that comes with high profitability of the cryptocurrencies.

Today, there are over 1,500 virtual currencies, including popular ones like Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple etc. that are traded in the digital currency market. The trading volume and investment in cryptocurrencies have increased exponentially in recent years.

Cryptocurrencies are digital currencies that are primarily used to purchase goods and services, similar to traditional currencies. However, the decentralized nature of cryptocurrencies, which means that they operate without intermediaries such as banks, financial institutions, or central authorities, has made them controversial from the beginning.

Taxation on Cryptocurrency – The Story So Far

For Indian investors who trade in virtual digital assets (VDAs) such as cryptocurrencies and NFTs, it is now mandatory to declare their income from VDAs as capital gains if they are held as investments.

If VDAs are held for trading purposes, the income is considered as business income. To facilitate the reporting of gains from VDAs, the Income Tax Return (ITR) forms for the financial year 2022-23 now have a dedicated section called Schedule – Virtual Digital Assets (VDA). The last date for filing income tax return for FY 2022-23 is 31st July 2023, with a belated return accepted until 31st December, 2023.

Regarding the Union Budget 2022 outcome, the Indian government has officially categorized digital assets, including crypto assets, as VDAs. Income from the transfer of VDAs such as cryptocurrencies and NFTs will be taxed at a rate of 30%.

Loss from VDAs cannot be set-off against any other income. Furthermore, gifting of VDAs will attract tax in the hands of the receiver. Finally, 1% TDS (Tax Deducted at Source) will be applicable on all sell transactions of VDAs, including cryptocurrencies and NFTs, starting from 1 July, 2022.

The Indian government has categorized cryptocurrencies and NFTs as “Virtual Digital Assets,” and as such, Section 2(47A) has been added to the Income Tax Act to define this term. The definition of VDAs is quite detailed, but it includes any information, code, number, or token generated through cryptographic means that is not an Indian or foreign fiat currency.   The government’s official stand on VDAs including cryptocurrencies was clarified in the 2022 Budget.

In simple terms, VDAs, for the purpose of taxation in India, encompasses all types of crypto assets, including NFTs, tokens, and cryptocurrencies, but do not include gift cards or vouchers.

Timeline of Crypto-Tax Evolution in India

2013: RBI warns investors about speculative investments, including cryptocurrencies.

2018: RBI restricts banking facilities to crypto exchanges, but the Indian crypto market still grows.

2020: Indian Supreme Court overturns RBI’s order, allowing cryptocurrency trading without any regulatory framework.

2022: Union Budget 2022 introduces crypto tax regulations, including a flat 30% tax on crypto and 1% TDS on sell transactions.

This timeline shows how the Indian government’s stance on cryptocurrency has evolved over the years, leading up to the current tax regulations in place.

How to Calculate Tax on Cryptocurrencies

If you trade, sell, or spend cryptocurrencies, you will be subject to a 30% tax on your profits. Additionally, if you sell crypto assets worth more than Rs. 50,000/- (or Rs. 10,000/- in certain cases) in a single financial year, you will be required to pay a 1% TDS tax.

Additionally, if you earn other income in crypto, such as through staking or mining, you may also be liable to pay income tax as per your individual tax rate.

Section 115BBH of the Income Tax Act, 1961

In the 2022 budget, the Finance minister introduced Section 115BBH. This section levies a 30% tax (with applicable surcharge and 4% cess) on profits made by trading cryptocurrencies on or after April 1, 2022.

This rate is the same as India’s highest Income Tax bracket (excluding surcharge and cess). The tax rate applies to private investors, commercial traders, and anyone else who transfers crypto assets in a given financial year.

In addition to this, the 30% tax rate will be applicable irrespective of the nature of income, so it doesn’t matter if it is investment income or business income and there is no distinction between short-term and long-term gains. So, trading, selling, or swapping cryptocurrency is irrespectively liable to tax.

Applicability of Crypto-Tax

The crypto tax applies to all investors, whether private or commercial, who transfer digital assets within a given year. It is worth noting that the tax rate is the same for short-term and long-term gains and it applies to all types of income regardless of business/professional or other source income, earned by the investors.

Tax Liability on Cryptocurrency Transactions

Different types of cryptocurrency transactions that are subject to the 30% tax rate include spending cryptocurrencies to purchase goods or services, exchanging cryptocurrencies for other cryptocurrencies, and trading cryptocurrencies using fiat currency like ₹(INR). However, keep in mind that other transactions in the crypto lifecycle are taxed at individual slab rates. These include receiving cryptocurrency as a gift, mining cryptocurrency, earning a salary in crypto, staking crypto and earning from cryptocurrency based gambling.

Tax Deduction at Source (TDS) on Crypto-Transactions

The TDS rate for crypto transactions in India has been set at 1%, and starting July 01, 2022, the buyer will be responsible for deducting TDS at this rate and paying the balance amount to the seller. In case of P2P transactions, the buyer will need to deduct TDS and file Form 26QE or 26Q, whichever is applicable.

For crypto-to-crypto transactions, TDS at the rate of 1% will be applicable to both the buyer and seller. It is worth noting that Indian exchanges automatically deduct TDS, while individuals trading on foreign exchanges must manually deduct TDS and file their TDS returns.

Failure to deduct tax at source will also result in an additional penalty usually levied under Section 271C of the Income Tax Act, 1961. The provisions of Section 276B may also be invoked against the concerned, if the taxpayer fails to remit TDS to the Government. The imprisonment penalty may extend upto 7 years, along with a hefty fine.

Deductions available to Crypto-tax Assessees

No deduction, except the cost of acquisition, is allowed on income from transfer of digital assets.

A gift of any VDAs such as Cryptocurrencies will attract tax in the hands of the receiver. Notably, the losses from one virtual digital currency cannot be set-off against income from another digital currency.

Reporting Gains from Cryptocurrencies for Taxation Purposes

To report your cryptocurrency for taxes for the financial year 2022-23 and assessment year 2023-24, you can use either the ITR-2 form or the ITR-3 form depending on whether you’re reporting it as capital gains or business income. The new ITR forms have a dedicated section called ‘Schedule VDA’ for reporting cryptocurrency gains or income.

The gains from crypto-transactions can be taxable as either business income or capital gains, depending on the investor’s intention and the nature of the transactions. If you engage in frequent trades and high volumes, the gains may be categorized as business income, and you should use ITR-3 to report crypto gains.

However, if you own cryptocurrency primarily for long-term appreciation in value, then gains would be classified as capital gains, and you should use ITR-2 to report crypto gains as per standard income tax rules.

Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates

taxscan-loader