Taxation On Cryptocurrency: Comprehensive Guide to Crypto Taxes in India 2024
Updated: Jul 31
Cryptocurrency has emerged in India as a leading avenue for investment among most investors, from the millennial tech-savvy to seasoned financial experts. As interest in digital currencies, such as Bitcoin, Ethereum, and several altcoins, continues to escalate, it is imperative to understand the taxation around them. The guide shall present an in-depth overview of cryptocurrency taxation in India so that investors are both compliant and, at the same time, optimized in terms of their tax obligations.
Table of Content
What are Cryptocurrencies?
Cryptocurrencies are decentralized, digital-based assets rooted in blockchain technology that aims to function as a medium of exchange. In other words, they operate on their own without any governing body or entity as an intermediary, and transaction records are secure, transparent, and immutable. Some of the well-known instances of cryptocurrencies are Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple. Digital currencies can be issued against services/goods sold or exchanged for a profit on several exchanges.
Cryptocurrency: Currency or Asset?
In India, cryptocurrencies are classified as "Virtual Digital Assets" (VDAs) under Section 2(47A) of the Income Tax Act. This definition covers all types of crypto assets, including NFTs, tokens, and cryptocurrencies, but does not include gift cards or vouchers. The implication of their classification as VDAs means that, so far as tax is concerned, cryptocurrencies are an asset and thus subjected to specified provisions of tax.
Is Crypto Taxed in India?
Yes, gains from cryptocurrency transactions are taxable in India. The government's stance regarding cryptocurrency taxation was clarified in the 2022 Budget, whereby it has been formally put under VDAs. This consequently opens up a separate regime for the taxation of cryptocurrency transactions and brings much-needed regulatory clarity to them for proper tax compliance.
Introduction of Crypto Taxation in India
The regulatory journey of taxation in cryptocurrency was initiated with the 2022 Union Budget that had brought out the key measures in respect of the income arising from the transfer of VDAs.
A flat 30% tax on income from the transfer of VDAs.
No deductions are allowed except the cost of acquisition.
Losses from digital assets cannot be set off against any other income.
A 1% TDS on all sell transactions of VDAs, with effect from 1st July 2022.
How is Cryptocurrency Taxed in India?
In the case of cryptocurrencies, special provisions under the Income Tax Act cover income tax in India. The following is imposed:
30% Tax on Gains: A flat 30% tax on gains from trading, selling, or swapping of cryptocurrency, plus an additional 4% cess over such tax. This includes both short-term and long-term gains, regardless of whether the income comes under capital gains or business income.
1% TDS: Just at the rate of 1%, TDS gets levied on transactions relating to the transfer of crypto assets if the consideration is more than INR 50,000 and, in some cases, it will be INR 10,000 in a financial year. It is to ensure the collection of tax at the source of the transaction.
Which Crypto Transactions are Liable to Tax in India?
The following forms of cryptocurrency transactions are taxed in India:
Spending Cryptocurrencies: Spend your cryptocurrency to buy any goods or services. Exchanging Cryptocurrencies: This is when one form of cryptocurrency gets exchanged for another.
Trading in Fiat Currency: Buying or selling of cryptocurrencies through traditional currency.
Receiving Payments in Cryptocurrency: Incomes are received in cryptocurrency for services rendered.
Receiving Cryptocurrency as a Gift: Even gifts in cryptocurrency are taxed as per the following Section 56 of the IT Act.
Mining Cryptocurrency: Incomes derived from mining activities.
Salary Payment in Cryptocurrency: Salaries paid in cryptocurrency.
Staking and Getting Rewards: Rewards from staking activities
Getting Airdrops: Free distribution of tokens or coins.
How to Calculate Tax on Crypto?
The amount of tax paid, in regards to cryptocurrency, is based on gains from transactions. Gains are calculated with the use of the formula: Gains = Selling Price - Cost Price.
Considering the hassle and complexity one could bear in managing multiple transactions on various exchanges and wallets, crypto bookkeeping software could be a tremendous help. Crypto bookkeeping software will help aggregate all the transactions, report capital gains, and track the taxes correctly.
Understanding TDS on Crypto Transactions
TDS is an attempt to tax cryptocurrency transactions at their source. A 1% TDS in India, came into effect from July 1, 2022, is applicable to transactions in excess of specified thresholds. TDS is to be deducted by the buyer at the source and forwarded to the government. In P2P transactions, TDS returns must be filed by the buyer. Exchanges in other cases may auto-deduct TDS.
Tax on Airdrops
Airdrop is when cryptocurrency tokens are directly sent to wallet addresses, mostly for free, to increase awareness and liquidity. Airdrops are considered income from other sources and are taxed accordingly at 30%, based on the FMV of the token at the time of receipt. Further disposition of said tokens through selling or swapping is then subjected to another 30% tax on gains.
Tax on Mining Cryptocurrency
Mining is the process whereby transactions on a blockchain network are verified and recorded using powerful computers. The mining rewards are taxed at a flat 30%, with zero costs of acquisition. There is no allowance for any expense deduction, such as electricity or infrastructure.
Tax on Crypto Staking/Forging
Staking is the process where rewards are made after holding on to and validating the transactions on a blockchain network. The earnings from staking are 30% taxable. Further, the gains from selling staked assets attract the same rate of tax. Generally, transferring one's coins to a staking pool or wallet does not attract taxes, but the staking rewards are taxable.
Tax on Crypto Gifts
The crypto-gifts have a taxable value. There would be no tax on gifts from close relatives; still, the amount is taxable above INR 50,000 from non-relatives, which are considered income from other sources. Gifts given during special occasions, or received as a result of inheritance, are not taxed at all.
Loss from Crypto Transactions
Losses on crypto transactions cannot be offset against any other income. For example, if one incurs a loss on one cryptocurrency, it cannot be used to reduce the gains from another cryptocurrency. That simply means all gains will be taxed at a full rate, with no consideration of losses.
Disclosure of Crypto Assets in Financial Statements
According to the requirement of the Ministry of Corporate Affairs (MCA), companies would have to specify gain and loss from virtual currency in the financial statement and also give details about the value of cryptocurrency holding as on the date of the balance sheet. Though this requirement is not there for individual taxpayers, reporting and payment of tax on crypto gain is a must for one and all.
Summary of Crypto Transactions and Applicable Rates
Here is a quick reference for the tax treatment of various crypto transactions:
Timeline of Crypto Tax Regulations in India
2013: RBI issued a warning circular pertaining to the speculative investments involved in cryptocurrencies.
2018: The RBI has cut down on banking facilities extended to crypto exchanges to check market growth.
2020: The Supreme Court struck down the restrictions of RBI, thus Mnement crypto market.
2022: The Union Budget brought in a flat 30 per cent tax on crypto gains and 1% TDS on transactions.
FAQ
Q1. What is the tax rate for gains on cryptocurrency in India?
Gains from trading in cryptocurrency in India are taxed at a flat 30% under the current regime of rules.
Q2. Is GST applicable to cryptocurrency transactions in India?
Yes, sale and purchase of cryptocurrencies are subjected to GST levied at 18%.
Q3. How are losses from cryptocurrency treated for income tax purposes in India?
Cryptocurrency losses cannot be set off against any other income. They can only be carried forward and set off against future gains in cryptocurrency.
Q4. Do I need to report my cryptocurrency holdings in my income tax return?
Yes, one needs to report his holding and transactions of cryptocurrency in his income tax return.
Q5. Is there any tax on the transfer of cryptocurrency between wallets?
No, transfer of cryptocurrency between personal wallets is not taxed but needs to be reported for record purposes.
Q6. Are airdrop and staking rewards taxable in India?
Yes, airdrops and staking rewards come under the ambit of income and hence are taxable at applicable income tax rates.
Q7. What if I don't declare my income from cryptocurrency in India?
Non-reporting of cryptocurrency income in India may attract penalties, fines, and prosecution under Indian tax laws.
Q8. Can one declare cryptocurrency as a capital asset in India?
Yes, they can be declared as capital assets and the gains from their sale will be treated as capital gains.
Q9. How can I maintain records of my cryptocurrency transactions for taxation purposes?
Maintain a full record of all the transactions, mentioning therein the date, amount, purpose of the transaction, and value of cryptocurrency as per the current INR value at the time of transaction.
Q10. Are there any exemptions for small cryptocurrency transactions?
There are, at least for the time being, no exemptions for small transactions. According to law, all cryptocurrency transactions need to be reported and subjected to taxation.
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