Cryptocurrency in India: Implications on Income Tax

Globally, digital assets and currencies like non-fungible tokens (NFTs) have become more and more well-known in recent years. The introduction of cryptocurrency exchanges has resulted in a significant increase in the trading of these assets. The cryptocurrency business is expanding quickly in India as well. However, this raises a question regarding taxation on crypto earnings. There was clarification on cryptocurrency taxation in the Budget 2022. Before 2022, cryptocurrencies were exempt from taxation. On the other hand, the 2022 and 2023 upgrades include provisions pertaining to their ITR reporting and taxation. So, let's examine the foundations of cryptocurrencies and the Indian taxation of them in this guide.

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Table of Contents

Understanding the Basics: What is Cryptocurrency?

Taxability of Cryptocurrency under the Income Tax Act

Crypto Tax Update in Budget 2023

Taxable Cryptocurrency Transactions in India

How is Cryptocurrency Taxed in India?

Calculation of Tax on Cryptocurrency

TDS on Crypto Transactions 

Tax on Crypto Forging/Staking

Tax on Crypto Mining

Tax on Crypto Gifts

Tax on Airdrops

Treatment of Crypto Transaction Losses

Disclosure of Crypto Assets

Conclusion

Most Asked Questions

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Understanding the Basics: What is Cryptocurrency?

"Cryptocurrency" describes a kind of digital asset or money that may be utilised to make purchases of products and services. The phrase refers to the fact that the transactions are safe due to their high level of encryption. It is decentralised as opposed to traditional currencies, which are managed and governed by a single entity. The value of the cryptocurrency market is an astounding $1.7 trillion. At present, the number of cryptocurrencies listed on exchanges exceeds 17,000, and this number is continuously increasing. However, because it is decentralized—that is, it functions without the assistance of any middlemen like banks, financial institutions, or central government agencies—it has largely remained controversial in India since its creation.

Taxability of Cryptocurrency under the Income Tax Act

"Virtual Digital Assets" includes cryptocurrency and NFTs; to further clarify this word, Section 2(47A) was added to the Income Tax Act. Although it goes into great length, the term essentially covers any data, code, number, or token created using cryptography that is not fiat money from India or another country. To put it simply, VDAs refer to all forms of cryptocurrency assets, excluding gift cards and vouchers, such as NFTs, tokens, and cryptocurrencies.

In India, cryptocurrency is subject to taxation. New regulations pertaining to cryptocurrency taxes have been included in the 2022 budget. The percentage of income from the transfer of digital assets, such as cryptocurrency, was maintained at a fixed 30%. Regardless of whether the gain is short-term or long-term, the person who has made any money from cryptocurrency trades is responsible for paying the tax.

Crypto Tax Update in Budget 2023

According to the latest update in Budget 2023, Indian investors who trade in cryptocurrencies and NFTs as investments must report their revenue from these transactions as capital gains. Crypto/NFT income is classified as business income if it is held for trading purposes. Gains from Cryptocurrency/NFTs and other VDAs are now reported in a separate part called Schedule - Virtual Digital Assets (VDA) on the revised Income Tax Return (ITR) forms for the fiscal year 2022–2023. July 31, 2023, is the deadline for filing income tax returns for the fiscal year 2022–2023. It is possible to file a late return by December 31, 2023.

Taxable Cryptocurrency Transactions in India

According to the Income Tax Act, the following crypto transactions are taxable in India:

• Transchanging one cryptocurrency for another

• Trading cryptocurrencies with fiat money like ₹(INR) 

• Using cryptocurrency funds to pay for products or services

• Getting paid with cryptocurrency for a service rendered

• Getting a gift of cryptocurrencies 

• Receiving pay in cryptocurrency 

• Mining virtual currency 

• Staking cryptocurrency and benefiting from stakes

• Receiving Airdrops 

How is Cryptocurrency Taxed in India?

The following are the highlights of crypto taxation in India: 

• Section 115BBH taxes profits from cryptocurrency trading at a rate of 30% (plus 4% cess). 

• All investors, whether private or commercial, who transfer digital assets during the year are subject to the crypto tax.

• Section 194S levies a 1% Tax Deducted at Source (TDS) on the transfer of crypto assets starting on July 01, 2022, if the transactions exceed ₹50,000 (or even ₹10,000 in some cases) in the same financial year. 

• For both short-term and long-term crypto gains, the entire income of the investor is subject to the same tax rate. 

• The acquisition cost is the only allowable deduction.

• Crypto Gains must be reported in the ITR under Schedule VDA.

Therefore, regardless of whether the income is classified as capital gains or business income, the profits from buying, selling, or swapping cryptocurrencies will be subject to a flat 30% tax (plus a 4% surcharge). On top of this tax, selling cryptocurrency assets for more than Rs 50,000 (or Rs 10,000 in certain circumstances) would also be subject to 1% TDS.

Calculation of Tax on Cryptocurrency 

A flat 30% tax is due on your cryptocurrency profits. Here's how to figure it out:

Profit from cryptocurrency = Sale price - Purchase price (acquisition cost) 

Crypto tax= 30% of cryptocurrency gains 

When you have a lot of transactions in several wallets and exchanges, the tax calculation on cryptocurrency will become very complicated. To handle and compile all of these transactions, crypto accounting software must be used. This will assist you in producing reports such as holding reports and capital gain reports. It entails the subsequent:

• Import every transaction made on various exchanges and wallets, including trades, withdrawals, and deposits

• Transactions like as trades, withdrawals, staking income, deposits, and so forth will be automatically recognised by the software

• Entries that are awaiting classification must be categorised. 

• Verification of the closing balance is the final step. This guarantees that the books and the closing balance correspond with respect to actual holdings.

TDS on Crypto Transactions

Tax Deducted at Source (TDS) seeks to tax cryptocurrency traders and investors as and when they complete a transaction. This is done by deducting a specific proportion at the source of each transaction. The TDS amount must be deducted by the buyer and sent to the central government if the buyer owes the seller money. The vendor will only be paid the remaining sum. The TDS rate for cryptocurrency in India is 1%. The buyer will be in charge of subtracting TDS at the 1% rate when paying the seller for the transfer of Crypto/NFT as of July 1st, 2022. If the transaction is conducted on an exchange, the exchange has the option to withhold the TDS and give the seller the remaining amount. 

• Transactions from Crypto to Crypto: TDS (one percent) will be charged to both the seller and the buyer. For instance, stablecoins being used to purchase cryptocurrency.

• P2P Transactions: In P2P transactions, the buyer is in charge of filing Form 26QE or 26Q, depending on which is appropriate, and deducting TDS. For instance, purchasing cryptocurrencies via an international exchange or P2P network using ₹(INR). 

Tax on Crypto Forging/Staking

Crypto forging, also known as staking or minting, is the process of creating new blocks in the blockchain by applying the Proof-of-Stake algorithm in return for commission fees and newly created cryptocurrency. You might be required to pay taxes on your profits if you stake cryptocurrencies. Your staking earnings are contingent upon the validator's Annual Percentage Rate (APR). For example, you will receive 10% interest annually if you stake $100 coins at a 10% annual percentage rate. You will pay 30% tax on this staking revenue that you make. Additionally, you will have to pay a 30% Capital Gains Tax when you sell your cryptocurrency asset. Taxes are normally not applied when you move your coins to a wallet or staking pool. Furthermore, transferring assets across wallets is frequently exempt from taxes.

Tax on Crypto Mining

Mining is the process of confirming and documenting transactions on a blockchain network. In a blockchain network, a collection of computers or nodes known as miners compete to solve challenging mathematical puzzles to validate transactions. Depending on the network, the amount of cryptocurrency awarded to the first miner to solve the riddle changes. Mining income is subject to a flat 30% tax. To calculate gains at the time of sale, the acquisition cost for cryptocurrency mining will be treated as zero. The cost of acquisition cannot include any costs for infrastructure or power. 

Tax on Crypto Gifts

Depending on whether a gift is made with cash, real estate, or personal property, the tax treatment varies. VDAs were added to the list of movable properties in Budget 2022. Therefore, if the total value of the presents exceeds Rs 50,000, the cryptocurrency gifts that are received will be taxed as "income from other sources" at ordinary slab rates. Gift cards, cryptocurrency tokens, or paper wallets can all be used to give cryptocurrency as gifts. Relatives' gifts of cryptocurrency are tax-exempt. The crypto gift from a non-relative, however, becomes taxable if its value is above Rs 50,000. Gifts given on special occasions, in anticipation of death, through marriage, inheritance, or will are not subject to taxation.

Tax on Airdrops

The act of releasing cryptocurrency tokens or money directly to particular wallet addresses, usually at no cost, is known as an airdrop. In the early phases of a new currency, airdrops are used to raise awareness of the token and boost liquidity. There is a 30% fee on airdrops. Such airdrops are taxable under Income from other sources. 

Treatment of Crypto Transaction Losses

Losses from bitcoin cannot be deducted from any income, including profits, according to Section 115BBH. Thus, while filing an ITR this year, a cryptocurrency investor cannot deduct losses from a cryptocurrency asset from prior years. Furthermore, Indian Bitcoin investors are only allowed to deduct acquisition or purchase costs from the expenses they incur in their cryptocurrency endeavours. For example, Mr. X bought Rs. 60,000 worth of Bitcoins and sold them for Rs. 80,000. Additionally, he spent Rs 40,000 on Ethereum, which he later sold for Rs 30,000. The exchange levied a Rs. 1000 trade fee. The following is how the tax on these two transactions will be calculated:

Bitcoin

Net profit= Rs. 80,000- Rs.60,000= Rs. 20,000

Tax@30%= Rs. 6000

Ethereum

Net loss= Rs. 40,000- Rs.30,000= Rs. 10,000

Tax= Nil

Total tax= Rs. 6000

In this case, a loss of Rs 10,000 cannot be compensated by gains of Rs 20,000. Taxes on the total Rs 20,000 earnings are 30%. Additionally, the Rs. 1,000 trade cost cannot be deducted.

In essence, gains and income from virtual digital assets are subject to taxation under the Income Tax Act. However, in the case that losses are sustained, no compensation or relief is offered. The unique treatment of virtual digital assets under the Income Tax Act is highlighted by the fact that they are subject to different taxation regulations than the majority of other assets in India.

Disclosure of Crypto Assets

Disclosure of gains and losses in virtual currencies in the notes to the accounts of company financial statements is now required by the Ministry of Corporate Affairs (MCA). Additionally, the value of cryptocurrencies as of the date of the balance sheet must be disclosed. As a result, as of April 1, 2021, schedule III of the Companies Act has been modified. This mandate may be viewed as the government's initial step towards cryptocurrency regulation. However, individual taxpayers are not compelled to comply with this mandate; it only applies to businesses. All users must, however, record and pay taxes on their cryptocurrency gains. 

Conclusion

It is essential to comprehend the rules and laws pertaining to cryptocurrency taxation in India. Understanding tax rates, reporting obligations, and potential fines for various cryptocurrency transactions are key points of this tax guide. It is crucial to adhere to TDS requirements and file IT on time. To ensure streamlined procedures, stay informed and consult a professional. You must stay current on changes to tax rules. Transparency, legitimacy, and peace of mind are guaranteed when engaging in cryptocurrency transactions in India by following these recommendations.

FAQ

Q1 . Is Cryptocurrency legal in India?

As of now, India has neither regulations nor any sort of prohibition on cryptocurrency. It can be stated that virtual assets, such as cryptocurrencies, will not be outlawed in India after the 2022 budget but will instead be regarded as a different class of asset. It's unclear right now because receiving income tax recognition for digital assets does not mean that they automatically acquire legal status.

Q2. Is cryptocurrency the same as NFT (Non-fungible tokens)?

Non-fungible tokens, or NFTs, are blockchain-based cryptographic assets that are distinguished from one another by distinctive identifiers and metadata.

Q3. Are cryptocurrencies a good investment?

Although the value of cryptocurrencies may increase, many investors do not view them as long-term investments; rather, they see them as speculative. It is important to remember that a currency requires stability.

Q4. Will I be taxed if I give someone cryptocurrency?

No, only the recipient of the cryptocurrency is subject to taxes. To include these transactions in the reporting system, Section 194S of the Income Tax Act was added. One percent withholding has been suggested as the recommended rate. These clauses became operative on July 1, 2022.

Q5. Are there any exemptions for crypto transaction profit?

Except for the expense of purchasing digital assets, no deductions are permitted. This implies that a taxpayer's earnings from the acquisition and selling of cryptocurrencies are not subject to deductions or exemptions.

Q6. How much is the tax on cryptocurrency in India?

In India, gains from cryptocurrencies are liable to Section 115BBH, which imposes a 30% tax (plus any relevant surcharge and 4% cess).

Q7. How should you report cryptocurrency on your tax return?

You must file your bitcoin taxes using the ITR-2 form (if you are reporting as a capital gain) or the ITR-3 form (if you are reporting as a business income) for the fiscal year 2023–2024 and assessment year 2024–2025. The 'Schedule VDA' portion of the new ITR forms is dedicated to reporting Bitcoin profits and income. 

Q8. How can I buy cryptocurrencies in India?

You can buy cryptocurrencies through various cryptocurrency exchanges that operate in India. These platforms allow you to purchase digital assets using Indian rupees (INR) or other cryptocurrencies.

Q9. What are the tax implications of investing in cryptocurrencies?

Cryptocurrency investments are subject to taxation in India. The tax treatment depends on factors such as whether you're trading or holding cryptocurrencies as investments. Consult a tax advisor for personalized advice.

Q10. What are the risks associated with investing in cryptocurrencies?

Investing in cryptocurrencies carries risks such as price volatility, regulatory uncertainty, security breaches, and potential fraud. It's essential to conduct thorough research and only invest what you can afford to lose.

Q11. Can I use cryptocurrencies for transactions in India?

While there are no explicit bans on using cryptocurrencies for transactions, the regulatory environment makes it challenging for businesses to accept digital assets as a form of payment. However, peer-to-peer transactions are still possible.

Q12. What is the future of cryptocurrencies in India?

The future of cryptocurrencies in India depends on how regulations evolve and how the technology is adopted. Some envision a regulated framework that promotes innovation, while others foresee stricter regulations or even a ban.

Q13. How can I secure my cryptocurrency holdings?

Security is paramount in the world of cryptocurrencies. Best practices include using reputable exchanges, implementing two-factor authentication (2FA), storing digital assets in hardware wallets, and staying vigilant against phishing attacks.

Q14. What is the role of blockchain technology in India beyond cryptocurrencies?

Blockchain technology has applications beyond cryptocurrencies, including supply chain management, identity verification, healthcare, and more. Indian businesses and government agencies are exploring blockchain's potential in various sectors.

Q15. Are cryptocurrency trading profits taxable in India?

Yes, profits from cryptocurrency trading are taxable as capital gains. Short-term gains (assets held for less than 36 months) are taxed according to individual slab rates, while long-term gains are taxed at 20% with indexation benefits under Sections 111A and 112A.

Q16. Is income from cryptocurrency mining subject to taxation?

Yes, income generated from cryptocurrency mining activities is treated as business income and taxed as per applicable slab rates under Section 28.

Q17. How is cryptocurrency received as income taxed?

Cryptocurrency received as income, such as payment for goods or services, is taxed based on its fair market value at the time of receipt under Section 56(2)(ix).

Q18. Are there any tax implications for entities facilitating large cryptocurrency transactions?

Yes, entities facilitating large cryptocurrency transactions may be subject to Tax Deduction at Source (TDS) provisions under relevant sections such as Section 194B, Section 194-O, etc.