Crypto Tax in India: Top 10 Ways to Save Crypto Taxes

While the world of cryptocurrency is shifting, so is the tax landscape around it. In India, crypto investors are learning to steer through a complicated tax framework that tries to define and tax these digital assets effectively. Such a regulation is important not only for compliance but also for tax optimization. Whether seasoned traders or new in the crypto market, saving on crypto taxes is vital to boost your return on investments. This blog will explore the top 10 strategies to save on crypto taxes in India, offering insights into deductions, how to time the transactions wisely, and so on.

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Table of Contents:

Latest Update on the Crypto Tax in india

Understanding Crypto Tax in India: Top 10 Ways to Save Crypto Taxes

Crypto Tax in India: Top 10 Ways to Save Crypto Taxes

• Utilize Loss Harvesting

• Investing in Bitcoin ETF Instead of Bitcoin Directly

• Opt for Tax-Advantaged Accounts

• Take Advantage of Deductions

• Gift Cryptocurrencies

• Charitable Contributions

• Use Crypto Tax Software

• Keep Meticulous Records

• Consider Using a Self-Directed IRA

• Consult a Tax Professional

Common Pitfalls to Avoid in Crypto Taxation

Conclusion

Most Asked Questions

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Latest update on the crypto tax in india

The Income Tax Return (ITR) for the financial year 2023-2024 includes a special section for reporting gains from cryptocurrencies and other virtual digital assets (VDAs) — known as the Schedule Virtual Digital Assets (VDAs).

Remember, the deadline to file your ITR for FY 2023-24 is July 31st, 2024. If you miss this date, you can still submit a belated return by December 31st, 2024.

Understanding Crypto Tax in India: Top 10 Ways to Save Crypto Taxes

Though cryptocurrencies are not accepted as legal tender in India, the income derived from crypto transactions is, however, taxable. The Indian tax authorities classify cryptocurrencies as either Virtual Digital Assets (VDAs) or capital assets, based on the nature of transactions and the intent of the user. The following are the stipulations of the tax framework for cryptocurrencies in India: 

• Flat Rate of 30% Tax on Virtual Digital Assets (VDAs): Gains from the transfer of cryptocurrencies or any VDA are taxed at a flat rate of 30%, no matter how long it has been held. This makes tax computation straightforward but eliminates the benefits of lower taxes for long-term holding.

• No Deduction of Expenses: Only the cost of acquisition is deductible while computing the income from the transfer of such assets. No other expenses, like electricity costs for mining or expenses related to security and wallet management, are allowed as deductions.

• No Set-Off of Losses: Crypto losses can neither be set off against any other income, such as salary or business income nor be carried forward to subsequent years.

• TDS Provisions: A Tax Deducted at Source (TDS) under Section 194S of 1% is applicable on the transfer of VDA exceeding a monetary threshold, ensuring tax reporting and compliance by both parties involved in the transaction.

The income tax department has not issued any specific guidance on the crypto tax. But relevant provisions are there. Section 115BBH and 194S deal with the taxation of virtual digital assets including cryptocurrencies, tokens, NFTs and more. The profits from the VDAs are subjected to a 30% flat tax and 1% of the TDS and potential income at the individual slab rate on the non-trading income.

Crypto Tax in India: Top 10 Ways to Save Crypto Taxes

Explore the following top 10 ways to make the most of your crypto investments while adhering to tax regulations.

Utilize Loss Harvesting

Loss harvesting refers to the sale of cryptocurrencies at a loss to offset gains from other investments. It becomes most effective in the case of a volatile market where the values of assets swing widely. By realizing a loss, investors can decrease their payable tax, which, in turn, decreases the tax liability on other capital gains. However, investors must be aware of the "wash sale" rule, which, though not specified for crypto in India, is practiced as a general rule in most places to prevent taxpayers from selling securities at a loss and buying back within a short period to claim a tax benefit.

Investing in Bitcoin ETF Instead of Bitcoin Directly

Investing in a Bitcoin ETF could yield different tax treatment compared to direct cryptocurrency purchases. ETFs are generally treated as securities, and any gains that may be made from the sale of ETF shares are treated as capital gains. This could potentially put forth a more favorable tax scenario, depending on the investor's overall financial situation and the specific tax rules applied to securities in their jurisdiction.

Opt for Tax-Advantaged Accounts

While not currently widely available in India, tax-advantaged accounts that allow for cryptocurrency investments could offer significant tax benefits. For example, if future regulations allow cryptocurrencies in retirement accounts like EPF or NPS, these accounts may offer tax-free growth or tax deferral.

Take Advantage of Deductions

There may be deductions for cryptocurrency transactions that investors should take advantage of, including but not limited to costs of trading fees, transaction fees, or even interest expenses from loans taken for investing in cryptocurrencies. These expenses can be tracked and used to reduce the amount of tax owed by increasing the cost basis for purchased crypto assets.

Gift Cryptocurrencies

Gifting cryptocurrencies to family or friends can be an effective way to cut down on your taxable estate. In India, generally, gifts received are taxed except when they are received from relatives or on specific occasions. However, the person receiving the gift may not pay any immediate tax, and if he sells the crypto later, the cost basis would be the original acquisition cost, which could lower the capital gains tax.

Charitable Contributions

Giving cryptocurrencies to a recognized charitable institution can lead to large tax deductions. The deductible amount would normally be the fair market value of the crypto at the time of donation, and this can be set off against a higher rate of tax, thereby reducing the overall taxable income.

Use Crypto Tax Software

There are a number of crypto tax software tools out there that will help manage and optimize your crypto taxes. Such tools can track each transaction, calculate the gains and losses, produce tax reports, and guide users on their tax liabilities and file them correctly.

Keep Meticulous Records

Keeping proper records of every cryptocurrency transaction is relevant for tax purposes. This includes the date of each transaction, the amounts that were purchased and sold, the market value in INR at the time of the transaction, and any fees related to the same. These records form the basis of accurately reporting gains and losses in capital during filing.

Consider Using a Self-Directed IRA

Investing in cryptocurrencies through tax-advantaged accounts can significantly reduce your tax burden. One potent option is a Self-Directed Individual Retirement Account (SDIRA). This type of IRA allows you to invest in a broader array of assets, including cryptocurrencies. 

The main types are Traditional and Roth SDIRAs, each offering different tax advantages:

• Traditional SDIRA: Contributions are often tax-deductible, and gains are tax-deferred until withdrawal.

• Roth SDIRA: Contributions are made with after-tax dollars, but withdrawals are tax-free after retirement, which is beneficial if you expect your tax rate to be higher in the future.

While using a SDIRA to invest in crypto can offer tax benefits, there are important considerations like account fees, the lack of liquidity of assets, and the need for careful compliance with IRS rules on prohibited transactions and asset storage.

Consult a Tax Professional

Consulting with a tax expert who is well aware of cryptocurrency regulations is a good idea because of the inherent complexity and changes in crypto taxation. They can give personalized advice, help navigate the tax implications of different transactions, and plan for optimal tax outcomes.

Common Pitfalls to Avoid in Crypto Taxation

Taxation of cryptocurrency can be complex and stressful, and even experienced investors can make mistakes that may land them in financial or legal trouble. Here are some common mistakes, along with some tips on how to avoid them:

• Failure to Report All Transactions 

  • Mistake: Many investors think they only need to report a transaction if they cash out or make a profit. 

  • Tip: Every transaction should be reported including trading one cryptocurrency for another, selling crypto to convert it to fiat, and using crypto to buy products or services. Using comprehensive crypto tax software can help track and report transactions more accurately. 

• Not knowing how crypto is taxed 

  • Mistake: A misunderstanding of the tax rules that apply to cryptocurrencies, for instance, thinking gains are only taxable when crypto is converted into a fiat.

  • Tip: Know your local tax regulations regarding cryptocurrencies. In most cases, any exchange of crypto, even for another crypto, can trigger a taxable event.

• Ignoring Deductible Expenses

  • Mistake: Many crypto traders fail to use the expenses that can be deducted. For example, transaction fees and any expenses from mining or trading.

  • Tip: Keep detailed records of all expenses directly related to your activities in crypto trading. These can be used to increase your cost basis and reduce the amount of gains that are subject to taxes.

• Ignoring Losses or Not Using Them Strategically 

  • Mistake: Not realizing the potential of using losses from crypto transactions for tax savings or not using these losses to offset gains.

  • Tip: Harvest those losses by actively selling poor-performing assets for a loss to help offset your gains. Also, remember to comply with any applicable wash sale rules.

• Incomplete Record Keeping 

  • Mistake: Not keeping accurate records or not keeping any records at all, which will make it impossible to file your taxes accurately and may result in fines or audits.

  • Tip: Use digital tools or software designed for crypto tracking to keep accurate and complete records of all your crypto transactions.

• Assuming All Regions Have the Same Taxes 

  • Mistake: Assuming tax rules are universally the same, which places a risk of non-compliance with local tax laws when moving or holding assets in different countries. 

  • Tip: Consult with tax professionals knowledgeable about the specific crypto tax laws in every jurisdiction where you hold assets or reside. 

• Miscalculating the Taxable Amount 

  • Mistake: Incorrect gain or loss on crypto transactions due to confusion over how to determine cost basis. 

  • Tip: Include the purchase price and all associated costs like transaction fees in the cost basis. Calculate the gain or loss each time you dispose of crypto to help ensure accuracy.

Conclusion

Cryptocurrency investment is a promising opportunity. But it comes with the tax implications that affect overall returns. By following the strategies mentioned in the article, tax burden can be minimized and more profits can be retained. 

However, the potential for tax savings on crypto transactions in India is quite limited. This is because a flat 30% tax is imposed on gains, without allowing for the deduction of inherent expenses incurred. Additionally, no exemptions or deductions are available for capital gains on crypto transactions, which restricts opportunities for tax planning and savings in India.

FAQ

Q1. What types of crypto transactions are subject to tax in India?

Any transfer, sale, or exchange of cryptocurrencies is subject to tax. This includes trading one cryptocurrency for another, selling crypto for fiat, and using crypto to purchase goods or services.

Q2. How are cryptocurrencies treated under the new regulations of India?

Cryptocurrencies are taxed at a flat rate of 30% on gains arising from the transfer of virtual digital assets irrespective of the holding period.

Q3. Can crypto losses be adjusted with any other income in India?

No, the losses incurred from the transfer of cryptocurrencies cannot be adjusted with any other income and cannot be carried forward to any subsequent year.

Q4. Are there any deductions provided for while working out the gains of crypto?

The only deduction permissible is the cost of acquisition of the cryptocurrency. No other expenditure related to the transaction, such as the transaction fee, shall be deductible under the new regime.

Q5. How can I save tax legally from crypto transactions?

Keep the cryptocurrencies for a long period, use crypto tax software to report your taxes accurately, keep records of every transaction, and consult an expert for customized advice.

Q6. What if I have already failed to declare some of my crypto transactions?

In this case, it would be best to seek the guidance of a tax advisor to discuss your options, which would include modifying previous tax returns to include unreported transactions.

Q7. Does crypto tax software help me save tax?

Crypto tax software does not directly lower tax liability but can help in proper reporting, figuring out possible deductible costs, and keeping records in detail, which could be beneficial during tax filing.

Q8. What records do I need for managing crypto taxes efficiently?

Maintain proper records of the date of purchase, sale date, the amounts, market values at the time of transactions, and related expenditure. These records will be necessary for deriving your tax liabilities.

Q9. What is the best way to report taxes on crypto?

Any trades involving the exchange of one cryptocurrency for another, or converting cryptocurrency to fiat currency, must be reported in the Schedule VDA section of the Income Tax Return form. This section is available in ITR forms 2 and 3.

Q10. What is the TDS rule for crypto?

TDS section 194S is there. In which the crypto buyer deducts 1% TDS at the purchase time. But these transactions are undertaken in the crypto exchange. Such exchange is liable for TDS deduction. 

Q11. Are cryptocurrencies a good investment?

Cryptocurrencies appreciate it. But many investors regard it as short term investments rather than long term ones. It also needs stability.

Q12. What are Virtual Digital Assets (VDAs) in India's crypto taxation, and how are they taxed?

In India, Virtual digital assets include cryptocurrencies and NFTs. Gains from the sale of these assets are taxed at 30%, with an additional 1% tax deducted at source (TDS) if the transaction exceeds INR 10,000. It's important to understand these tax rules if you're involved in the crypto market in India.