Taxation on cryptocurrency

What are crypto currencies?

In layman’s terms, cryptocurrencies are digital currencies designed to buy goods and services, similar to other currencies. However, they have largely been controversial due to their decentralised nature, meaning their operation without any intermediary like banks, financial institutions, or central authorities. A cryptocurrency can be defined as a decentralised digital asset and a medium of exchange based on blockchain technology.

Is crypto ‘Currency’ or an ‘Asset

Crypto and NFTs were categorised 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 cryptocurrencies, but they will not include gift cards or vouchers.

Is crypto taxed in India?

Yes, gains from cryptocurrency are taxable in India. The government’s official stance on cryptocurrencies and other VDAs was clarified in the 2022 Budget.

How is cryptocurrency taxed in India?

In India, cryptocurrencies are classified as virtual digital assets and are subject to taxation.

• Gains made from trading cryptocurrencies are taxed at a rate of 30% (plus 4% cess) according to Section 115BBH.
• Section 194S levies 1% Tax Deducted at Source (TDS) on the transfer of crypto assets from July 01, 2022, if the transactions exceed ₹50,000 (or even ₹10,000 in some cases) in the same financial year.
• The crypto tax applies to all investors, whether private or commercial, who transfer digital assets during the year.
• The tax rate is the same for short-term and long-term gains, and it applies to all types of income earned by the investor.
• Therefore, the gains from trading, selling, or swapping cryptocurrency will be taxed at a flat 30% (plus a 4% surcharge), irrespective of whether the income is treated as capital gains or business income.
• In addition to this tax, 1% TDS will also apply on the sale of crypto assets of more than Rs 50,000 (or Rs 10,000 in certain cases).

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.

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 cryptocurrencies to purchase goods or services.
• Exchanging cryptocurrencies for other cryptocurrencies
• Trading cryptocurrency using fiat currency such as ₹(INR)
• Receive cryptocurrency as payment for a service
• Receiving cryptocurrency as a gift
• Mining cryptocurrency
• Drawing a salary in crypto
• Staking crypto and earning stake benefits
• Receiving Airdrops

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 P2P transactions, the buyer is responsible for deducting TDS and filing Form 26QE or 26Q, whichever is applicable. Eg: Buying cryptocurrency using ₹(INR) over a P2P platform or international exchange.
• Crypto-to-Crypto Transactions: TDS will be applicable to both buyer and seller at 1%. Eg: Buying crypto with stable coins

Tax on Airdrops

An airdrop refers to the process of distributing cryptocurrency tokens or coins directly to specific wallet addresses, generally for free. Airdrops are done to increase awareness about the token and increase liquidity in the early stages of a new currency. Airdrops are taxed at 30%. Such airdrops are taxable under Income from other sources.

Tax on mining cryptocurrency

Mining refers to the process of verifying and recording transactions on a blockchain network using powerful computers or specialised mining hardware. In a blockchain network, transactions are verified by a group of nodes or computers, called miners, who compete to solve complex mathematical puzzles. The first miner to solve the puzzle is rewarded with a certain amount of cryptocurrency, which varies depending on the network.

Mining income received will be taxed at a flat 30%. The cost of acquisition for crypto mining will be considered ‘Zero’ for computing the gains at the time of sale. No expenses such as electricity or infra cost can be included in the cost of acquisition.

Tax on crypto staking/forging

In the realm of cryptocurrencies, forging (or minting) refers to the process of generating new blocks in the blockchain using the Proof-of-Stake algorithm in exchange for rewards in the form of newly generated cryptocurrencies and commission fees.

If you stake cryptocurrency, you may have to pay taxes on your earnings. The amount you earn from staking depends on the Annual Percentage Rate (APR) offered by the validator. For instance, if you stake 100 coins with a 10% APR, you will earn 10% interest every year.

This income you earn from staking will be taxed at 30%. Additionally, when you sell your crypto asset, you will be liable to pay 30% Capital Gains Tax.

In general, transferring your coins to a staking pool or wallet does not typically attract taxes. Additionally, moving assets between wallets is often considered tax-exempt.

Tax on crypto gifts

Tax treatment on gifts differs depending on whether it is money, immovable property or movable property. In Budget 2022, VDAs were included within the scope of movable properties. 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.

Crypto received as gifts from relatives will be tax-exempt. However, if the value of the crypto gift from a non-relative exceeds Rs 50,000, it becomes taxable. Gifts received on special occasions, through inheritance or will, marriage, or in contemplation of death, are also exempt from taxes.

Loss from crypto transactions

As per Section 115BBH, losses incurred in crypto cannot be offset against any income, including gains from cryptocurrency. So, a crypto investor cannot off set previous year losses from a crypto asset while filing ITR this year.

Moreover, Indian investors in cryptocurrency are not permitted to claim expenses related to their crypto activities, except for the acquisition cost or purchase cost.

Disclosure of crypto assets in schedule of assets and liabilities :

Ministry of Corporate Affairs (MCA) has made it mandatory to disclose gains and losses in virtual currencies in notes to accounts of Company Financial statements. Also, the value of cryptocurrency as of the balance sheet date is to be reported. Accordingly, changes have been made in schedule III of the Companies Act starting from 1 April 2021. This mandate can be considered as the first move of the government towards regulating cryptocurrencies. 

Please note that this mandate is only for companies, and no such compliance is required from individual taxpayers. However, reporting and paying taxes on the gains of cryptocurrency is a must for all.

Author – Ektha Surana