Introduction
In recent years, the world has witnessed a surge in crypto currency transactions, and India is no exception. As digital currencies gain popularity, it’s essential to understand their taxation implications, especially in a country like India where tax laws are stringent and ever-evolving.
What is Crypto currency
Crypto currency is like digital money that uses special technology to keep it secure and doesn’t need a bank to control it. It’s decentralized, meaning no single authority governs it, and transactions are recorded on a digital ledger called a block chain
The government’s classification of crypto currencies, NFTs, and tokens as virtual digital assets (VDAs) establishes their inclusion in the taxation framework. Therefore, any gains or income generated from these assets are subject to taxation. It is essential to navigate the crypto tax landscape to ensure compliance and accurately report your financial activities related to crypto currencies.
Crypto Tax Highlights
30% tax on crypto income as per Section 115BBH, applicable from April 1, 2022
1% TDS on the transfer of VDAs as per Section 194S, applicable from July 1, 2022
No deduction is allowed except for the cost of acquisition.
Crypto Gains should be reported under Schedule VDA in the ITR.
Is crypto a ‘currency’ or an ‘asset’
Crypto and NFTs were categorized as “Virtual Digital Assets” and Section 2(47A) was added to the Income Tax Act to define this term. The definition is quite detailed but mainly includes any information, code, number or token (not Indian or foreign fiat currency), generated through cryptographic means. In simple words, VDAs mean all types of crypto assets, including NFTs, tokens, and crypto currencies but it will not include gift cards or vouchers.
Is crypto taxed in India?
Yes, gains from crypto currency are taxable in India. The government’s official stance on crypto currencies and other VDAs, was clarified in the 2022 Budget.
How are Crypto currencies Taxed in India?
All crypto currency purchases, sales, and transactions are subject to a 30% capital gains tax on profits, with no provisions for reduced rates or deductions under Section 115BBH. Along with the capital gains tax, a 1% Tax Deducted at Source (TDS) fee is applied to crypto asset transfers. Any transaction exceeding Rs 50,000 in a given financial year, the TDS that is deducted will be reflected in 26 AS and the same can be claimed back.
What are the Tax Implications on Different Types of Transactions?
Crypto currency taxation in India encompasses various scenarios, each with its own tax implications. Understanding these implications is essential for accurate compliance.
1. Purchasing Crypto currencies: Buying crypto currencies with Indian rupees is generally tax-free. However, if the purchase is conducted through peer-to-peer or foreign websites, a 1% Tax Deducted at Source (TDS) deduction is applicable.
2 Capital Gains Tax:Holding onto crypto currencies is tax-free, but it is important to keep track of transactions to calculate capital gains or losses accurately. Profits from buying stablecoins or exchanging one crypto currency for another are subject to a 30% tax rate.
3 Selling Crypto currencies: Selling crypto currencies, whether for fiat money or other crypto currencies, attracts a 30% tax rate with a 1% TDS deduction.
4 Wallet Transfers: Transferring cryptocurrencies within your own wallets is tax-free since ownership remains unchanged. Such transfers are not considered virtual asset transfers.
5 Airdrops and Forks:Profits from selling airdropped or forked tokens are subject to a 30% capital gains tax. Airdrops are treated as gifts, and income tax is payable based on the fair market value of the received tokens. Exemptions may apply if the total value of airdrops and gifts remains below ₹50,000.
6 Gifting and Donating Crypto currencies: Gifts from immediate family members or costing less than ₹50,000 are tax-free. Gifts received on special occasions or through inheritance are also exempt from tax. However, gifts valued above ₹50,000 within a fiscal year are subject to income tax.Therefore, crypto gifts received will be taxed as ‘income from other sources’ at regular slab rates if the total value of gifts is more than Rs 50,000. Donating crypto currencies to recognized charities does not qualify for tax deductions and may incur a 30% tax. When giving crypto currencies as gifts in India, the recipient is responsible for any applicable tax ..
7 Mining and Staking Rewards: The Indian Income Tax Department has not provided specific rules for taxing mining and staking rewards. It is likely that income tax will be levied on rewards based on the individual’s applicable tax rate. Selling, exchanging, or utilizing the rewards may also attract a 30% tax on profits. It is advisable to consult with an experienced accountant for guidance in such cases.
Understanding TDS on Crypto Transactions
Tax Deducted at Source (TDS) aims to tax the crypto traders and investors as and when they carry out a transaction by deducting a certain percentage at the source. A buyer who owes a payment to the seller must subtract the TDS amount and forward it to the central government. Only the balance amount will be paid to the seller. In India, the TDS rate for crypto is set at 1%. Starting from July 01, 2022, the buyer will be responsible for deducting TDS at the 1% rate while making payment to the seller for the transfer of Crypto/NFT. If the transaction takes place on an exchange, then the exchange may deduct the TDS and pay the balance to the seller. Indian exchanges automatically deduct TDS, while individuals trading on foreign exchanges must manually deduct TDS and file their TDS returns.
P2P Transactions: In case of P2P transactions, buyer will be responsible for deducting TDS and filing Form 26QE or 26Q, whichever is applicable.
Eg: Buying crypto currency using ₹(INR) over a P2P platform or international exchange.
Crypto-to-Crypto Transactions: TDS will be applicable on both buyer and seller at 1%
Eg: Buying crypto with stable coins
Non-Applicability of 194S TDS on VDA: It is important to note that TDS under Section 194S is applicable at the time of purchase of VDA from an Indian Tax Resident only. Thus if you are Trading in an International exchange, DEX, you will be interacting with a non-resident or non-resident entity, then one can take a stand that Section 194S is not applicable.
Loss from Crypto Transactions’
As per Section 115BBH, any losses incurred in crypto cannot be offset against any income, including gains from crypto currency. So, a crypto investor cannot off set previous year losses from a crypto asset while filing ITR this year.
Moreover, Indian investors in crypto currency are not permitted to claim expenses related to their crypto activities, except for the acquisition cost or purchase cost.
Which Crypto Transactions are liable to tax in India?
If you engage in any of the following transactions, you will be required to pay a 30% tax:
- Spending crypto currencies to purchase goods or services.
- Exchanging crypto currencies for other crypto currencies
- Trading crypto currency using fiat currency such as ₹(INR)
- Receive crypto currency as payment for a service
- Receiving crypto currency as a gift
- Mining crypto currency
- Drawing a salary in crypto
- Staking crypto and earning stake benefits
- Receiving Airdrops
How to Calculate Tax on Crypto currencies?
Let’s look at it with a simple example,
Suppose B purchased 10 Ethereum coins on March 1, 2023, at a total cost of Rs 8,00,000. After holding them for some time, B decides to sell 7 Ethereum coins on September 1, 2023, for Rs 15,00,000.
To calculate the tax liability for B,The cost of acquisition for B’s 10 Ethereum coins is Rs 8,00,000.
To determine the capital gains, we subtract the cost of acquisition from the selling price:
Selling Price: B sold 7 Ethereum coins for Rs 15,00,000.
Capital Gains: Selling Price – Cost of Acquisition
15,00,000 – 5,60,000 = Rs 9,40,000
The capital gains amount to Rs 9,40,000, which will be subject to the flat tax rate of 30%.
Tax Liability: Capital Gains * Tax Rate 9,40,000 * 0.30 = Rs 2,82,000
In this example, B would have a tax liability of Rs 2,82,000 on the capital gains from the crypto currency transaction.
How to report crypto currency on tax return?
For the financial year 2022-23 and assessment year 2023-24, you will need to declare your crypto currency taxes using either the ITR-2 form (if reporting as capital gains) or the ITR-3 form (if reporting as business income). The new ITR forms include a specific section ‘Schedule VDA’ for reporting crypto currency gains or income.
As per the standard income tax rules, the gains on the crypto-transactions would become taxable as
(i) Business income or (ii) Capital gains. This classification will depend on the investors’ intention and nature of these transactions.
Business income: If there are frequent trades and high volumes, gains from the crypto currency may be categorized as ‘business income’. In such a case, you may use ITR-3 for reporting the crypto gains.
Capital gains: On the other hand, if the primary reason for owning the crypto currency is to benefit from long-term appreciation in value, then the gains would be classified as ‘capital gains’. In this case, you may use ITR-2 for reporting the crypto gains.
Summary of Crypto Transactions and the Applicable Rate
| Transaction | Tax Treatment |
| Buying crypto | 1% Tax Deducted at Source (TDS) by the exchange (excluding international & P2P trades) |
| Selling crypto | 30% tax on any capital gains |
| Trading crypto for crypto | 30% tax on any gains |
| Holding crypto | Generally tax-free, but subject to capital gains tax upon disposal |
| Moving crypto between your own wallets | Generally tax-free; ensure proper documentation for audit trails |
| 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 |
| Gifts of crypto | The recipient will be subject to tax; exemptions is for gifts from close family |
| Donating crypto | Only cash donations are tax deductible; any perceived profits may be subject to 30% tax |
| Mining rewards | Income Tax at your individual tax rate; 30% tax if later sold |
| Staking rewards | Income Tax at your individual tax rate; 30% tax if later sold |
Conclusion
crypto currency in India presents both opportunities and challenges. While it offers potential for innovation, financial inclusion, and investment diversification, regulatory uncertainty, security concerns, and volatility remain significant hurdles. As the landscape evolves, policymakers must balance fostering innovation with protecting investors and maintaining financial stability to realize the full potential of crypto currencies in India’s economy.