Understanding Crypto Taxes in India: A Beginner’s Guide

I. Introduction

Cryptocurrency has become increasingly popular in the last decade, finding use cases in various businesses and organisations. 

With a market cap of over $1 trillion, the cryptocurrency ecosystem relies on a decentralised network that enables seamless and anonymous peer-to-peer transactions. However, the rise of cryptocurrency has also been met with a series of scrutiny and regulatory battles. 

In India, for instance, while cryptocurrency is not considered legal tender, the government is developing a framework to regulate the market and its taxation.

• In the 2022 Finance Bill, Finance Minister Ms Nirmala Sitharaman introduced Section 115BBH, which levies a 30% tax on profits made by trading cryptocurrencies or other virtual digital assets starting from April 1, 2022. 
• Additionally, the 194S section imposes a 1% tax at source on the transfer of crypto assets starting from July 1, 2022, if the transactions exceed ₹50,000 (or even ₹10,000 in some cases) in the same financial year. 
• These tax compliances are applicable to private investors, commercial traders, and anyone else involved in crypto sales and trades, irrespective of the nature of the investor’s income. The tax rate also does not differentiate between short-term and long-term gains.
• For individuals and businesses involved in cryptocurrency trading, it is crucial to understand the tax implications of investing in cryptocurrencies in India. 

It is essential for beginners to gain an understanding of the landscape of crypto tax in India and how it affects their investments and transactions.

II. Taxable Events in Cryptocurrency

Cryptocurrency transactions in India are subject to taxation, and there are several taxable events associated with digital currency.

The most common of these include:

Buying and selling cryptocurrency

When you purchase or sell crypto, both you and the seller are subject to tax consequences. The seller must declare the transfer of funds as ‘gross income’ based on the fair market value of the coin at the time of the transaction. On the other hand, you must record the transaction as a capital gain since you cashed out an investment to make the purchase. The profit is calculated by determining the difference between the price of the coin at the time of purchase and its market value. 

Trading

Profits made from trading cryptocurrencies to or from another individual or exchange is considered a taxable event. Therefore, it’s crucial to keep track of your crypto transactions and maintain accurate records.

Receiving crypto as a gift

If you receive cryptocurrencies as a gift, they are treated as income and are subject to the applicable tax rates.

• Gifts with a value of up to INR 50,000 are tax-exempt.
• Gifts from relatives exceeding INR 50,000 are exempt from taxation.
• The value of gifts from non-relatives exceeding INR 50,000 is taxable.
• VDA gifts received on special occasions, as an inheritance or by will, or in cases of death are exempt from taxation.

Mining Crypto

Mining cryptocurrencies is considered a taxable event in India. Mining income will be classified according to the type of activity.

Depending on the nature of the activity, mining income can be reported either as income from business or income from other sources.

If a user takes part in mining as a hobby, it may be disclosed as Income from Other Sources.

Airdrops 

Airdrops are when a cryptocurrency project gives away coins or tokens to a large number of recipients for free. Airdrops are also considered a taxable event and must be reported in your income tax return.

Airdrops are taxed as income from other sources only if they have value as of the date of receipt and are traded on exchanges, or DEXes.

Airdrops of cryptocurrencies are considered gifts for tax purposes and may qualify for tax exemption.

III. Understanding the Tax Implications

The Indian Budget 2023 placed greater emphasis on India’s TDS framework. In India, the sale of cryptocurrencies for fiat currencies such as INR is subject to a ‘30% tax rate’, and a ‘1% TDS’ is deducted by Indian crypto exchanges or the buyer on P2P and international platforms. The 1% TDS applies starting July 1st, 2022, and is applicable to crypto-to-crypto trades as well. 

However, no TDS is required to be deducted if the consideration is payable by a “specified person” and their total crypto trading activities do not exceed ₹50,000 in a single financial year.

In accordance with Section 234E, late filing penalties consist of a ‘daily fine of ₹200’ until the return is filed. This penalty amount must be paid on a daily basis until it equals the amount of tax withheld. It is essential to stay ahead of any changes to TDS rules or tax laws that may be introduced in the budget, and, if necessary, to seek professional assistance to ensure the accuracy of your tax filing.

IV. Reporting Cryptocurrency on Tax Returns

Taxpayers in India who have made any income through cryptocurrency are subject to the same taxation rules as other forms of income.

If a taxpayer trades cryptocurrency, invests in it or does anything else that generates revenue, that person must report it as income and pay taxes on it.

Any income generated from cryptocurrency should be reported on the Income Tax Return (ITR). This includes capital gains from trading or holding cryptocurrency, income from mining, or any other form of income from cryptocurrency.

The Financial Budget 2022 in India states that if you trade, sell, or spend crypto, you will be subject to a “30% tax on profits.”.

Indian crypto investors cannot offset losses from their crypto investments against any other gains or income, according to Section 115 BBH. They are also unable to claim any crypto-related expenses except for the cost of acquisition.

To calculate the tax on your cryptocurrency, you must follow the steps below:

• Determine the cost of acquisition: This is the amount you spent to purchase the cryptocurrency.
• Determine the fair market value (FMV) on the date of sale: This is the price at which the crypto was sold.
• Calculate the capital gain: the FMV on the date of sale – the cost of acquisition.

Once the profit is determined, it will be subject to a tax rate of 30%.

To report these taxes, the ITR filing due date is July 31, of every financial year.

Here are some instances where investors may not be required to pay taxes on their crypto investments in India. 

Firstly, if an investor is ‘HODLing (holding) crypto’ and has not sold or traded it yet, then they will not be subject to taxes. 

Secondly, if an investor transfers crypto between their ‘own wallets’, they will not be taxed as well. 

Additionally, if an investor receives a gift of crypto up to ₹50,000 from friends or relatives, they will not be subject to taxes. Finally, receiving a gift of any amount of crypto from close family members is also tax-free. 

While these exemptions provide some relief for investors, it is important to understand the tax laws and regulations surrounding crypto investments in India and seek professional advice when necessary.

V. Challenges and Future of Crypto Taxation in India

The foremost challenge of the crypto taxation Industry in India is the lack of clarity and consistency in the existing regulations. 

Despite several regulatory guidelines, the government has yet to provide a clear and consistent framework for taxation. This has left many investors and exchanges in a state of uncertainty, making them reluctant to invest in the industry.

Another challenge is the lack of response from the government when it comes to disputes between investors and exchanges. Since the government has yet to develop a full-fledged working regulatory framework around digital currency, investors are often left with no recourse.

Finally, the lack of transparency in the taxation process is another issue. Currently, the taxation process is opaque and often requires investors to manually calculate their taxes. This is often time-consuming and confusing for many investors, resulting in inaccurate tax calculations.

Grey areas in the current tax regulations regarding crypto investments in India have created confusion and uncertainty for investors. For example, the tax treatment of “airdrops and hard forks” is still unclear. Countries around the world are grappling with how to tax different types of cryptocurrencies, and India is no exception. Proposed changes to crypto taxation in India include the introduction of a new tax category for cryptocurrencies and the establishment of a regulatory framework for crypto exchanges. 

It is crucial for crypto investors to stay up-to-date with the evolving regulations in their jurisdiction, as failure to comply with tax laws can result in fines and penalties. Additionally, staying informed can help investors make informed decisions and minimise tax liability.

The hidden silver lining

Despite such a ruthless tax environment, there is hope for the future of crypto taxation in India.

The Indian government has recently announced plans to develop a unified framework for taxation. This would provide clarity and consistency to the existing regulations and make it easier for investors and exchanges to understand the process.

In addition, the government appears to be actively working towards regulating the cryptocurrency industry. According to Union Finance Minister Ms. Nirmala Sitharaman, India intends to develop standard operating procedures for virtual currencies. However, a single nation imposing these regulations cannot succeed on its own. It is a position that must be taken by the majority of nations in the long run.

VI. Conclusion

By now, it’s established that the crypto taxes aren’t going anywhere. What matters most, however, is that people stay educated and updated about the framework of the industry.

Staying up-to-date with the evolving crypto regulations in India is essential for crypto investors and traders as the industry is pivoting towards a tighter framework.

Key points regarding cryptocurrency taxes:

Summarising the Indian Crypto Taxation and Regulations in India includes the following key pointers:  

• Profits earned from cryptocurrency assets are subject to a 30% tax rate plus any relevant surcharge and 4% CESS. Section 115BBH of the tax code applies to such profits, and there is no option for a lower long-term capital gains tax rate.
• Deductions are not allowed, except for purchase costs.
• The transfer of Virtual Digital Assets (VDAs) is subject to a 1% TDS payment.
• As of April 1, 2022, the 30% tax rate is in effect, and as of July 1, 2022, the 1% TDS rate is in effect.
• Transactions that may incur taxes include selling cryptocurrency for fiat currency, trading stablecoins and other cryptocurrencies, using cryptocurrency to purchase goods and services, coin mining, paying with cryptocurrency, receiving stake benefits, and receiving airdrops. Taxes may be applied upon receipt at an individual tax rate in some situations.

Key Take Away

In conclusion, crypto taxes in India are a complex and evolving area of regulation that can be confusing for crypto investors. However, there are free resources available, such as crypto tax calculators, crypto experts, and crypto tax software, that can help investors navigate the landscape conveniently. Additionally, while Bitcoin and other crypto assets are associated with decentralisation and blockchain technology, they are still taxable in India as digital currency or Virtual Digital Assets. Investors can save tax on cryptocurrency by understanding the tax implications of their investments and seeking professional advice when necessary. Overall, staying informed and compliant with income tax regulations is crucial for those involved in the cryptocurrency industry in India.