Cryptocurrency Tax in India: What Every Investor Should Know

The taxation of cryptocurrency in India as detailed in the Finance Act of 2022, contains two parts: a flat taxation rate of 30% on all gains and a 1% Tax Deducted at Source (TDS) for all transactions. Under Section 115BBH of Income Tax Act, all profits realised through trading and transfer from virtual digital assets (VDAs) will incur a 30% tax rate plus an additional 4% cess regardless of how long the crypto assets were held or the actions associated with acquiring them, buying or selling.

Losses incurred from a crypto investment cannot offset other profits/income gained from any type of investment other than that in crypto. Losses incurred during one taxation year cannot be carried over to the next taxation year. As a result, crypto traders will experience an increased effective tax burden. Additionally, Section 194S requires a 1% TDS be withheld on all payments made for the transfer of VDAs that exceed ₹50,000 (₹10,000 in certain cases) during any one financial year. This requirement allows for better transparency and increased compliance.

Impact of Cryptocurrency Taxation on Investors and Traders

i. Tax rate of 30% on Gains: All investments made by crypto investors will be taxed at 30 per cent on any profits realised when they sell or exchange the investment, regardless of how long they held the investment. For example, a bitcoin investor purchases a bitcoin worth ₹1 crore and subsequently sells it for ₹1.50 crore, resulting in a profit of ₹50,000. Their profit is subject to a 30 per cent tax rate, which will result in the investor owing ₹15,000 in taxes, as well as the cess.

ii. No Offsetting of Losses: Under section 115BBH of the Income Tax Act of 1961, losses incurred via cryptocurrencies cannot be used to offset profits made via cryptocurrencies or profits earned from other types of income. Thus, if an investor experiences a loss of ₹2,00,000 in Ethereum and a gain of ₹3,00,000 in Bitcoin, they will pay 30 per cent in taxes on the full ₹3,00,000 gain, with no offset for the loss.

iii. 1% TDS on Crypto-Currency Transactions: As outlined in section 194S of the Income Tax Act of 1961, all transactions exceeding ₹50,000 or ₹10,000 for special cases are subject to 1 per cent TDS. So, for example, if you complete a transaction of ₹10,00,000, the buyer of that transaction will have to withhold ₹10,000 for TDS.

iv. Newly Established ITR Schedule Specifically for Crypto-Gain Reporting: Following the introduction of Schedule VDA for the reporting of crypto-gain in ITR forms, the number of people required to report crypto-gain will increase. This is due to the additional costs associated with fulfilling the compliance responsibilities associated with this new schedule.

v. Penalties for TDS Compliance Failures: Failure to deduct or remit TDS on crypto-currency transactions may result in penalties imposed by Section 271C and 276B of the Income Tax Act, 1961, including monetary fines and/or imprisonment.

Compliance Tips for Investors in the Crypto of Taxes

1. Detailed Record Keeping: Investors must keep records of all crypto transactions, including purchase and sale dates, values received and paid, transaction costs, wallet addresses, and transaction ID’s for verification to support their tax filings to support their defence in the event of the need to prove income/expense is reported accurately.
2. Use Crypto Tax Software: You can easily calculate your gains and losses using an automatic crypto tax calculator. Tools like Koinly, CoinTracker, and Tax2win make it easy to collect and report TDS deductions. They allow for full integration with all major exchanges so that you'll always have the latest information available when preparing your tax return.
3. Schedule VDA Reporting: For ITR reporting purposes, all crypto gains must have been accurately reported in Schedule VDA of the ITR form or risk penalties and increased scrutiny from tax authorities.
4. Professional Consultation: Tax regulations change constantly, and taxpayers should be familiar with what is new when it comes to collecting and reporting taxes, as well as the ability to claim deductions for some of their expenses. When dealing with more complex tax situations, such as those involving bitcoin mining, staking and airdrops, or cross-border transactions, it is best for you to work with a professional accountant that has a thorough understanding of these types of transactions in order to ensure that you are complying with tax regulations and maximizing your tax benefits.
5. Stay Updated: The Indian government and the Central Board of Direct Taxes continue to evaluate the landscape of cryptocurrency, and investors should remain informed about the government releases regarding cryptocurrency legislation, specifically surrounding taxes.

Ongoing Debates and Policy Discussions

Parliament is still debating how cryptocurrency is taxed in India, and many politicians and other stakeholders continue to express their opinions that the recently implemented 30% tax on crypto investors and 1% deducted for transactions will stifle investment and innovation in cryptocurrency in India. There are many in Parliament who believe the current model of taxation for cryptocurrency is unfair and as such, they have expressed an interest in changing the regulations and providing more oversight for the development of blockchain technology in India.

In addition to providing the public with insight into their views on the current legal status of cryptocurrencies in India through their debates, the Indian Government has stated that it is currently considering taking further steps toward implementing further regulations, which may include possible bans or licensing requirements. Thus, the Government views the implementation of the TDS and the imposition of the 30% tax as steps toward implementing further regulatory scrutiny on the technology surrounding digital assets and cryptocurrencies, however, continued debates regarding the long-term effects of these new policies continue.

Conclusion

These new policies provide the public, particularly investors, with greater compliance and transparency regarding their tax obligations but many ongoing debates regarding the need to develop an appropriate balance between promoting innovation and protecting investor interests continue among the public and within the courts.