Cryptocurrencies have been making waves in the world of finance, and for good reason. Its unique properties have made it a popular speculative investment option for people across the globe. However, as with any investment, there are tax implications that come with owning digital assets and with recent announcements of Crypto Tax in India it has become necessary for every investor and crypto enthusiast to understand the implications.
While the announcement of a flat 30% tax on income from the transfer of Virtual Digital Assets (VDAs), including cryptocurrencies and NFTs, in India’s 2022 budget has given major recognition to the Indian crypto industry, it has also created a lot of confusion and anxiety among crypto users in India.
Here are some important outcomes from the Union Budget about Crypto Tax in India:
- Income from the transfer of virtual digital assets such as crypto and NFTs will be taxed at 30%.
- No deduction, except the cost of acquisition, will be allowed while reporting income from the transfer of digital assets.
- Loss from digital assets cannot be set off against any other income.
- Gifting of digital assets will attract tax in the hands of the receiver. Losses incurred from one virtual digital currency cannot be set off against income from another digital currency.
Now that we know the latest developments in crypto taxation in India, let’s take a look at how you can prepare for your taxes.
Important terminologies and definitions
As per Income Tax provisions, a cryptocurrency is defined as:
- a form of virtual digital asset
- not being an Indian currency or foreign currency as per the provisions of Foreign Exchange Management Act, 1999
- a unit of account that functions as a store of value
- an asset that can be transferred, stored or traded electronically
2. Classification of Virtual Digital Asset
As per the country’s Finance Bill, 2022, cryptocurrencies are classified as capital assets for the purpose of taxation and hence, income under the head ‘capital gain’ will arise on transactions of the same.
3. Tax on income from Cryptocurrencies [Section 115BBH]
There is no specific Bitcoin or Crypto Tax in India. Instead the Indian government plans to tax crypto as Income from Other Sources which is quite similar to a savings bank account interest, fixed deposits or winning lotteries under this head.
Profits from transfer of VDAs such as crypto and NFTs will be charged a flat 30% tax. This rate applies to private investors, commercial traders and anyone else who transfers crypto in a given financial year.
Taxable transfers of crypto include:
- Selling crypto for INR or another fiat currency
- Trading crypto for crypto (including stablecoins)
- Spending crypto on goods and services
- Gifting crypto
- Mining coins as a potential income from other sources
- Getting paid salary in crypto
- Staking rewards
- Mining tokens
We will discuss each of these in detail in the next section. But first, it is important to understand the legal status of cryptocurrencies.
Does taxation make cryptocurrency legal?
The Indian government has not yet granted any status of legal tender to cryptocurrencies. In 2018, the Reserve Bank of India (RBI) tried to impose a ban by restricting banking facilities to crypto exchanges.
However, this ban was later ruled out by the Supreme Court on constitutional grounds and virtual exchanges’ fundamental rights. The income tax department has not yet offered any clarification regarding the tax implications on the gains earned from crypto transactions.
How will Crypto Tax in India work?
Any investor who earns profits from the sale of cryptocurrency must pay income tax. All incomes, except exempted explicitly by the Income Tax Act (as established above) are subject to tax.
As per the standard income tax rules, the gains on crypto transactions would be taxable as:
(i) Business income or
(ii) Capital gains
This classification will depend on the investors’ intentions and the nature of these transactions. If there are frequent trades and in high volumes, gains from cryptocurrency transactions will be charged as ‘business income’.
On the other hand, if the purpose of owning crypto is to benefit from long-term appreciation in value with fewer trades, it will be taxed as capital gains.
There are a few other factors under this classification
Classification under business income
If crypto transactions are reported as business income, the implications of GST should also be examined. However, we will save this for a section towards the end of this article.
Classification under capital gains
If crypto transactions are classified as ‘investments’ it will be considered as capital gains or losses under the heading ‘capital gains.’ If the sale value of the transaction is more than the cost, then it is regarded as ‘capital gains’ and if the price is higher then it is considered as ‘capital losses’.
As per the applicable income tax slabs, short-term capital gains tax can be levied if the crypto assets are held for a period of less than 3 years or 36 months. However, if the crypto-assets are sold after being held for three years or 36 months, then they will be regarded as long-term investments and taxed at 20% with indexation benefits.
TDS on cryptocurrency
Under the new regime, the buyer of a crypto asset must deduct a 1% ‘TDS’ on behalf of the seller if a transaction exceeds Rs. 10,000. Smaller trades would also be taxed if they top a cumulative ₹50,000 in a financial year. Investors will be entitled to a refund if the total amount set aside for TDS during a fiscal year exceeds their overall tax liability for the period.
The TDS rule is set to be effective from 1st July 2022. The transactions that will attract the 1% deduction will be sell or limit sell order. No buy and limit buy orders will be subject to this deduction. For eg: If you purchased Bitcoin for 1000 INR, and sell it for 2000 INR, its 1% i.e. 20 INR will be credited to the government on your behalf.
This can then be claimed while filing ITR for that year. For eg: If above was the only trade you made in the financial year, then your tax burden is 30% of the capital gained i.e. 300 INR. So your net effective tax liability is 300 – 20 = 280 INR. Thus, the TDS deduction is automatic at the time if sell orders and can be settled when the tax payment arises.
How is tax calculated on cryptocurrency?
To calculate tax on cryptocurrency, you need to deduct the purchase price from the selling price of cryptocurrencies you made income from, and calculate 30% of its value. In addition to 30% of the tax you would also need to pay cess at 4% of the tax amount.
Let’s understand this better with an example:
Let’s say that the purchase price of the cryptocurrency: 50,000 INR
The selling price of the cryptocurrency: 70,000 INR
Profit: 20,000 INR
Tax: 6,000 INR
Cess: 4% at 6,000 = 240 INR
Total tax liability = 6,240 INR
Let’s say you make two transactions here.
Transaction 1: purchased bitcoin at 5,00,000 INR and sold at 6,00,000 INR
Transaction 2: purchased Ethereum for 2,00,000 INR and sold at 1,50,000 INR
The net income from the above two transactions is 50,000 INR, but since losses cannot be set off against other crypto income, the taxable net income is 100,000 INR.
Tax payable: 30% of 100,000 INR = 30,000 INR
Cess: 4% of 30,000 INR = 1200
Total tax liability: 31,200 INR
Crypto and GST if treated as a business income
If recent announcements are to be considered, the GST (Goods and Service Tax) Council is likely to consider levying 28% GST on cryptocurrencies and Bitcoin at par with lotteries, casinos, race courses, and betting.
However, this proposal is to be laid for discussion in the next GST Council meeting the date of which has not been disclosed. As per the current rules, 18% tax is levied on the service provided by crypto exchanges categorized as ‘financial services.
While there is still clarity to be provided on this front (watch this space!), it seems that the GST council is in favor of crypto assets and accepting it as a business activity. This would also mean that currently, there are no double taxation issues for businesses dealing in cryptocurrency.
Frequently Asked Questions
When do I have to pay 30% tax on income from cryptocurrency?
According to the official Budget document, 30% tax on cryptocurrency and other VDAs would be applicable from Assessment Year 2023-24. This means that all income from crypto transactions in FY 2022-23 will be taxed at the rate of 30%.
Can you avoid 30% crypto tax by buying cryptocurrency on foreign exchanges?
According to legal experts, it’s not possible to avoid the 30% tax on crypto profits by using a foreign exchange. This is because the tax is levied on income made by Indians through trading or investing in cryptocurrencies and other VDAs, and has nothing to do with the location or origin of this income.
What if Indian exchanges move abroad?
The current tax regime in India has forced many of the nation’s cryptocurrency exchanges to shift operations to more crypto-friendly states like Singapore and Dubai, but this doesn’t affect Indian investors at all. The Indian government taxes investors regardless of the geographical location a crypto investment was made in.
Do I have to pay tax on both gains and losses from crypto?
Losses arising from the transfer of crypto assets cannot be set off against any other income and it cannot be carried forward.
Will I have to pay tax on income from crypto or NFT airdrops?
Crypto investors who have received airdropped crypto tokens or NFTs as gifts will have to pay tax.
With the decisions made by the Indian government, many crypto veterans are hoping for a silver lining and a positive outlook. Although crypto taxation is not at par with stocks or mutual funds, there is an expectation of relaxation in the near future. The ball is now in the court of the Indian government, and it remains to be seen what will be the next move.