Cryptocurrencies in India fall under the virtual digital assets (VDAs) category and are subject to taxation. The profits generated from cryptocurrency trading are taxed at a rate of 30 per cent, with an additional four per cent cess as per Section 115BBH. Starting from July 01, 2022, Section 194S imposes a one per cent Tax Deducted at Source (TDS) on transferring crypto assets, applicable if the transactions exceed Rs 50,000 (or Rs 10,000 in specific cases) within the same financial year. This crypto tax applies to all investors, whether private individuals or businesses, engaging in digital asset transfers throughout the year.
Cryptocurrencies are digital currencies intended for purchasing goods and services, much like traditional currencies. Nevertheless, controversy has surrounded them because of their decentralized nature, operating without intermediaries such as banks, financial institutions, or central authorities.
The digital currency landscape currently boasts over 1,500 virtual currencies, including well-known names like bitcoin, ethereum, litecoin, dogecoin, ripple, matic, and more. The investment and trading activities in cryptocurrencies have experienced significant growth over time.
The crypto tax, set at 30 per cent, is applied to the income derived from cryptocurrency transactions. This income is calculated as the difference between the sale and cost prices. The formula simplifies the process of determining the taxable amount and ensures that taxpayers can easily compute the tax liability on their cryptocurrency gains.
The tax rate remains consistent for short-term and long-term gains, encompassing all the investor's income. Consequently, whether the income is classified as capital gains or business income, gains from trading, selling, or swapping cryptocurrency will be subject to a flat 30 per cent tax and a four per cent surcharge. In addition to this tax, a one per cent TDS is levied on the sale of crypto assets exceeding Rs 50,000 (or Rs 10,000 in specific cases). The Union Budget 2022 introduced crypto tax regulations, the most important being a flat 30 per cent tax on crypto and one per cent TDS on sell transactions.
If you engage in any of the following transactions, you will be required to pay a 30 per cent tax:
Spending cryptocurrencies to purchase goods or services.
Exchanging cryptocurrencies for other cryptocurrencies
Trading cryptocurrency using fiat currency such as rupee.
Receive cryptocurrency as payment for a service
Receiving cryptocurrency as a gift
Drawing a salary in crypto
Staking crypto and earning stake benefits
For the financial year 2022-23 and assessment year 2023-24, the declaration of cryptocurrency taxes is mandatory using either the ITR-2 form (for reporting as capital gains) or the ITR-3 form (for reporting as business income). The newly updated ITR forms feature a dedicated section called 'Schedule VDA' explicitly for reporting cryptocurrency gains or income.
Following standard income tax rules, the taxation of gains from crypto-transactions can be classified into two categories:
(i) Business income
(ii) Capital gains
The categorization depends on the investor's intention and the nature of the transactions. If there are frequent trades and high volumes, the gains may be classified as 'business income,' in such cases, ITR-3 is the appropriate form for reporting crypto gains. On the other hand, if the primary purpose of holding cryptocurrency is to benefit from long-term appreciation in value, the gains fall under the category of 'capital gains,' and ITR-2 is the suitable form for reporting such crypto gains. The choice of form depends on the investor's strategy and the nature of their involvement in cryptocurrency transactions.
The latest ITR forms now incorporate a distinct schedule labelled VDA (Virtual Digital Assets). Taxpayers are obligated to fulfil a 30 per cent payment and provide reporting in accordance with the VDA schedule. This specific schedule, VDA, is integrated into Schedule CG (capital gains). Additionally, the new form mandates a quarterly breakdown of the income derived from VDAs.
Archit Gupta, CEO of Clear, a fintech company, says, "In the context of ITR-3, Schedule VDA offers two distinct options for reporting income. Users have the flexibility to choose between categorizing the income either as capital gains or as business income. It's crucial for taxpayers to exercise caution and note that regardless of their chosen reporting category, only the cost of acquisition is eligible for deduction from the sale price. This underscores the importance of careful consideration in reporting to ensure accurate and compliant financial disclosures."
"The initial and paramount step for taxpayers is creating a comprehensive crypto profit and loss (P&L) report. This serves as the foundation for populating their ITR. Utilizing tools such as ClearTax is highly recommended, as they streamline both P&L generation and compliance in filing the intricate ITR schedules. The complexity of the schedules intensifies for taxpayers engaged in numerous crypto transactions, dealing with a substantial volume of TDS entries, managing airdrops, or aiming to optimize tax savings. Employing specialized tools ensures a more efficient and accurate process in navigating these complexities," he adds.
When taxing crypto gifts, the treatment varies based on the nature of the gift, whether it's money, immovable property, or movable property. With the inclusion of VDAs within the scope of movable properties in Budget 2022, crypto gifts are now subject to taxation
as 'income from other sources' at the regular slab rates if the total value of the gifts exceeds Rs 50,000.
"Cryptos can be gifted in various forms, including gift cards, crypto tokens, or a crypto paper wallet. If the crypto is received as a gift from a relative, it is tax-exempt. However, if the value of the crypto gift from a non-relative surpasses Rs 50,000, it becomes taxable. Certain occasions, such as gifts received through inheritance, wills, marriage, or in contemplation of death, are exempt from taxes," says Gupta.
Crypto Transaction Losses: Section 115BBH stipulates that losses in cryptocurrency cannot be used to reduce taxes on other income, including gains from cryptocurrency. This implies that a crypto investor can't offset losses from the previous year's crypto assets when filing the current year's ITR.
Additionally, it's crucial to highlight that Indian investors in cryptocurrency are restricted from claiming expenses related to their crypto activities, except for the acquisition or purchase cost. This limitation limits the deduction of various expenses linked to cryptocurrency transactions, underscoring the unique treatment of such assets according to Indian tax regulations.
TDS On Crypto Transactions: TDS is designed to levy taxes on crypto traders and investors at the time of the transaction by withholding a specific percentage at the source. When a buyer owes payment to the seller, they are required to deduct the TDS amount and remit it to the central government. The remaining balance is then paid to the seller. In India, the TDS rate for crypto is fixed at one per cent. From July 01, 2022, the buyer bears the responsibility of deducting TDS at the one per cent rate when making payments to the seller for crypto/NFT transfers. If the transaction occurs on an exchange, the exchange may handle the TDS deduction and disburse the balance to the seller. While Indian exchanges automatically deduct TDS, individuals trading on foreign exchanges need to manually deduct TDS and file their TDS returns.
P2P Transactions: In P2P transactions, the buyer is accountable for deducting TDS and filing either Form 26QE or 26Q, depending on the situation. For example, purchasing cryptocurrency using rupees through a P2P platform or international exchange.
Crypto-To-Crypto Transactions: TDS is applicable to both the buyer and the seller at a rate of one per cent. For instance, buying crypto with stablecoins.
Tax On Airdrops: An airdrop is the distribution of cryptocurrency tokens or coins directly to specific wallet addresses, typically without charge. The purpose of airdrops is to raise awareness of the token and enhance liquidity during the initial phases of a new currency. A 30 per cent tax is applied to airdrops.
The airdrops will be taxed on the following amount:
Receiving Crypto: The taxation of airdrops is based on the value determined in accordance with Rule 11UA, specifically the fair market value of the tokens as of the date of receipt on exchanges or DEXes. A 30 per cent tax will be imposed on this determined value.
Sell, Swap, Or Spend Them Later: In the event that you choose to sell, swap, or spend these tokens at a later time, a 30 per cent tax will be applied to the gains realized.