Cryptocurrency taxation

Cryptocurrencies, a revolutionary digital asset class, have gained significant traction globally, including in India. But what exactly are cryptocurrencies—are they a currency or an asset? The tax implications depend on this classification. In India, not all crypto transactions are taxed, but understanding which ones are, such as trading, mining, staking, gifting, or even airdrops, is crucial. Taxes are calculated based on the type of transaction, and mechanisms like TDS on crypto trades and tax treatments for DeFi transactions add complexity. While losses from crypto transactions may raise questions about set-off, even buying crypto might trigger tax obligations under certain scenarios. Selecting the correct ITR form and accurately reporting these transactions are vital for compliance. With evolving regulations, this blog provides clarity on how to navigate crypto taxation in India, including key milestones in its legislative timeline, ensuring you’re informed and compliant.

What are Cryptocurrencies?

Cryptocurrencies are digital or virtual currencies that use blockchain technology to secure transactions, control the creation of new units, and verify asset transfers. Unlike traditional currencies issued by central banks, cryptocurrencies operate on decentralized networks, often leveraging blockchain technology—a distributed ledger maintained across a network of computers. Bitcoin, Ethereum, and Ripple are some popular examples. Cryptocurrencies offer features like peer-to-peer transactions, low transfer costs, and global accessibility, making them a disruptive force in the financial landscape. However, their volatility, regulatory scrutiny, and evolving use cases raise questions about their classification and taxation worldwide.

Is Crypto ‘Currency’ or an ‘Asset’?

The classification of cryptocurrencies has been a subject of debate. While they are called “currencies,” their usage as a medium of exchange is limited compared to fiat currencies like the Indian Rupee or the US Dollar. Instead, cryptocurrencies are often treated as assets or commodities due to their investment appeal and speculative trading nature. In India, regulatory guidelines view cryptocurrencies more as assets than legal tender. This distinction is critical for taxation purposes: as an asset, profits or losses from crypto transactions are taxed similarly to gains from stocks, real estate, or other capital assets, while a currency would traditionally not be taxed during exchanges. 

Crypto and NFTs are classified as “Virtual Digital Assets” under Section 2(47A) of the Income Tax Act, which was introduced to define this term. In simpler terms, VDAs encompass all types of crypto assets, such as NFTs, tokens, and cryptocurrencies, but specifically exclude items like gift cards and vouchers. Understanding this classification helps clarify legal obligations and investment strategies.

Which Crypto Transactions Are Subject to Tax in India?

  1. Trading of Cryptocurrencies: Any profit made from buying and selling cryptocurrencies is taxable, whether the transaction involves fiat currency or another cryptocurrency.
  2. Crypto Mining Rewards
  3. Crypto Staking or Forging
  4. Receiving Airdrops
  5. Receiving Cryptocurrencies as gift
  6. DeFi Transactions: Earnings from decentralized finance (DeFi) platforms, such as interest or staking rewards.
  7. Exchanges between Cryptocurrencies

How is Cryptocurrency Taxed in India?

Cryptocurrency taxation in India has undergone significant changes, especially with the introduction of Section 115BBH of the Income Tax Act, 1961, effective from April 1, 2022. Here’s a breakdown of how cryptocurrencies are taxed:

  1. Flat Tax Rate: Gains from crypto transactions are taxed at a flat rate of 30%, irrespective of the individual’s income tax slab. This rate applies to all virtual digital assets (VDAs), including cryptocurrencies irrespective of whether the income is treated as capital gains or business income. The tax rate is the same for short-term and long-term gains.
  2. No Deductions Allowed: Apart from the cost of acquisition, no deductions or exemptions are allowed for crypto-related expenses. This includes costs like transaction fees, mining setup costs, or other incidental expenses.
  3. Tax Deducted at Source (TDS): A 1% TDS is deducted on payments exceeding ₹50,000 in a financial year (or ₹10,000 in certain cases) made during the transfer of crypto assets. This amount can be claimed as a credit while filing income tax returns.
  4. Loss Adjustment Not Permitted: Losses from crypto transactions cannot be set off against any gains. Similarly, losses cannot be carried forward to subsequent financial years.

Summary of Crypto transaction and tax rates

Cryptocurrency taxation

How to Calculate Tax on Crypto?

Calculating tax on cryptocurrency transactions in India involves the following steps:

  1. Calculate the Sale Proceeds:

    The sale price or fair market value (FMV) of the cryptocurrency at the time of the transaction is considered.

  2. Deduct the Cost of Acquisition:

    Subtract the purchase price or acquisition cost from the sale proceeds. Note: Expenses like transaction fees or mining costs cannot be deducted.

  3. Apply the Tax Rate:

    A flat 30% tax is levied under Section 115BBH irrespective of whether the income is treated as capital gains or business income.

  4. Consider TDS Credits:

    Subtract any Tax Deducted at Source (TDS) that has already been paid on the transaction.

TDS on Crypto Transactions

Tax Deducted at Source (TDS) on cryptocurrency transactions was introduced to ensure tax compliance. Here are the key points:

  1. Applicability:

    TDS is deducted on the transfer of cryptocurrency or other virtual digital assets (VDAs) if the payment exceeds ₹50,000 in a financial year (or ₹10,000 in certain cases).
  2. Rate of TDS:

    TDS is levied at 1% of the transaction value.
  3. Who Deducts TDS?

    The buyer of the cryptocurrency is responsible for deducting TDS and depositing it with the government. For transactions conducted on platforms, exchanges often facilitate TDS deduction.
  4. TDS Filing and Reporting:

    The deducted amount must be deposited with the Income Tax Department, and the details reported in Form 26Q.
  5. Credit of TDS:

    The seller can claim the TDS amount as credit while filing their income tax return, reducing their overall tax liability.
  6. Compliance Requirement:

    Failing to deduct TDS or deposit it on time can attract penalties, interest, or both.

TDS on crypto transactions ensures that tax authorities can track and collect revenue on digital asset trades, making it crucial for buyers and sellers to comply with these provisions.

Tax on Mining Cryptocurrency

Mining is the process of validating and recording transactions on a blockchain network using advanced computers or specialized mining hardware. In this system, a group of nodes or computers, known as miners, competes to solve intricate mathematical problems. The miner who successfully solves the puzzle first is rewarded with a specific amount of cryptocurrency, which varies based on the blockchain network.

The fair market value (FMV) as per Rule 11UA, i.e. at the fair market value of the tokens as on the date of receipt on exchanges or DEXes of the cryptocurrency at the time it is mined is considered as income. Mining income received will be taxed at a flat 30% and is considered as income under “Income from Other Sources.” The cost of acquisition (e.g., electricity and equipment expenses) cannot be deducted for tax calculation purposes.

Tax on Crypto Staking/Forging

Forging (or minting) is the process of creating new blocks on the blockchain using the Proof-of-Stake (PoS) algorithm. In return, participants receive rewards in the form of newly minted cryptocurrencies and commission fees. If you earn income through staking, it may be subject to taxation. Your staking earnings depend on the Annual Percentage Rate (APR) provided by the validator. For example, staking 100 coins with a 10% APR would yield 10% interest annually, adding to your cryptocurrency holdings. This income you earn from staking will be taxed at 30% classified under virtual digital asset (VDA). 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 free. 

Tax on Crypto Gifts

Cryptocurrencies received as gifts are taxable in India if their value exceeds ₹50,000. The recipient must declare the gift as income under “Income from Other Sources,” except when received from specified relatives or on special occasions such as marriage. The value of the gift is determined at the time of transfer and taxed accordingly.

Tax on Airdrops

A cryptocurrency airdrop is a marketing strategy that involves sending coins or tokens to wallet addresses. Small amounts of the new virtual currency are sent to the wallets of active members of the blockchain community for free or in return for a small service, such as retweeting a post sent by the company issuing the currency. The ultimate goal of a crypto airdrop is to promote awareness and circulation of a new token or coin.

Airdrops will be taxed on the value determined as per Rule 11UA, i.e. at the fair market value of the tokens as on the date of receipt on exchanges or DEXes. Tax will be levied at 30% on such value.If these tokens are later sold or transferred, any gains from the transaction are also subject to the 30% flat tax on VDAs.

Tax on DeFi Transactions

Decentralized finance (DeFi) is an emerging peer-to-peer financial system that uses blockchain and cryptocurrencies to allow people, businesses, or other entities to transact directly with each other. The key principle behind DeFi is to remove third parties like banks from the financial system, thereby reducing costs and transaction times.

Income earned through decentralized finance (DeFi) platforms, such as interest, staking rewards, or liquidity pool returns, is taxable. The earnings are classified as “Income from Other Sources” and taxed at 30% and is to be reported in VDA schedule of ITR.

Loss from Crypto Transactions

In India, losses from cryptocurrency transactions are treated differently compared to other types of investments. Under the new rules introduced by Section 115BBH of the Income Tax Act, 1961, losses incurred on the sale or transfer of cryptocurrencies cannot be set off against gains from other sources, such as salary or business income or even from other cryptocurrencies. Additionally, these losses cannot be carried forward to subsequent financial years to offset future gains. This strict treatment emphasizes the need for crypto investors to plan transactions carefully, as any losses incurred are effectively non-recoverable from a tax perspective.

Which ITR Form is Applicable for Cryptocurrency?

The appropriate Income Tax Return (ITR) form for cryptocurrency transactions depends on the taxpayer’s income sources:

  1. ITR-2: Suitable for individuals earning income from the sale of cryptocurrencies alongwith income from salary, capital gains on shares,etc and income from other sources.
  2. ITR-3: Suitable for individuals earning income from the sale of cryptocurrencies alongwith income from salary, business income, capital gains on shares,etc and income from other sources.

How to Report Cryptocurrency Transactions in ITR?

Reporting cryptocurrency transactions in your Income Tax Return (ITR) involves the following steps:

  1. Declare Gains or Losses: Report each transaction, including dates, acquisition costs, sale proceeds, and fair market value in schedule VDA (Virutal digital assets).
  2. Report TDS Details: Include any TDS deducted on crypto transactions in the TDS schedule to claim credit.

Timeline of Crypto Tax Regulations in India

2013 – Early Warnings: The Reserve Bank of India (RBI) issued its first public advisory, cautioning users about the risks of cryptocurrencies, including fraud and volatility.

2017 – Surge in Interest: With Bitcoin’s popularity skyrocketing, the RBI reiterated warnings. A government panel was formed to explore the regulation of cryptocurrencies.

2018 – Banking Ban: The RBI issued a circular prohibiting banks and financial institutions from dealing in cryptocurrencies, effectively curbing the industry’s growth. This decision was later challenged in the Supreme Court.

2020 – Supreme Court Verdict: The Supreme Court struck down the RBI’s banking ban, providing temporary relief to crypto exchanges and investors.

2021 – Budget Announcement: The government signaled its intention to regulate cryptocurrencies. Rumors of a complete ban created uncertainty, while industry stakeholders urged for a progressive framework.

2022 – Introduction of Crypto Taxation:

In the Union Budget 2022-23, Finance Minister Nirmala Sitharaman announced a 30% tax on income from virtual digital assets (VDAs), including cryptocurrencies.

A 1% TDS on crypto transactions above specified thresholds was introduced to improve traceability.

Losses from VDAs were restricted from being set off against other income.

2023 – Proposals for a Global Framework: The Indian government actively participated in discussions at global forums like the G20, advocating for a unified approach to regulating cryptocurrencies.

Ongoing Developments: India continues to monitor crypto trends while emphasizing compliance and investor protection. Future regulations may further define the status and treatment of cryptocurrencies in the financial system.

Summary

Cryptocurrency taxation in India has evolved from initial caution to structured regulation, reflecting the government’s balancing act between fostering innovation and ensuring financial oversight. While a 30% flat tax and 1% TDS on crypto transactions have brought clarity, the inability to set off or carry forward losses poses challenges for investors. The classification of cryptocurrencies as assets rather than currencies has significant implications for their taxation. Accurate reporting in ITR forms, understanding tax liabilities for activities like mining, staking, and DeFi transactions, and staying updated on evolving regulations are crucial for compliance. As the regulatory framework develops further, a clearer roadmap for the crypto ecosystem in India is anticipated.

You can contact us +91 9769647582 for any professional help in filing ITR with crypto transactions.

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