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Over the last few years, digital currencies and assets such as NFTs (non-fungible tokens) have gained popularity around the world. With the launch of cryptocurrency exchanges, trading in these assets has expanded dramatically.
Cryptocurrency or digital asset has altered the playing field for investors and businesses all around the world. The first cryptocurrency, Bitcoin, arose as the aftermath of the 2008 financial crisis. It was the first blockchain-based cryptocurrency, and it revolutionized the way people thought about money. Post that, a lot of cryptocurrencies have come into existence, and in India, the market is growing at a rapid pace.
The Budget 2022 came with clarity on the taxation of cryptocurrencies. Before the year 2022, there was no tax applicable to cryptocurrencies. However, the updates in 2022 and 2023 consist of provisions regarding their taxation and reporting in ITR. So in this guide, let’s explore the fundamentals of cryptocurrency and its taxation in India.
Disclosure of Crypto Assets in Schedule VDA
Following are the latest updates in respect of disclosure of crypto assets in ITR -
The term "cryptocurrency" refers to a type of digital asset or currency that can be used to buy goods and services. The term is called so because the transactions are highly encrypted, ensuring that they are safe. Unlike traditional currencies, which are regulated and controlled by a central body, it is decentralized.
The cryptocurrency market is worth a massive $1.7 trillion. Currently, there are over 17,000 cryptocurrencies listed on the exchanges, and this figure is constantly on the rise. However, in India, it has primarily remained controversial since its inception due to its decentralized nature, which means it operates without the use of any intermediaries such as banks, financial organizations, or central agencies.
Yes, cryptocurrency is liable to tax in India. In the 2022 budget, new rules related to the taxation of cryptocurrencies have been introduced. It was kept at a flat 30% on income from the transfer of digital assets such as cryptocurrencies. The tax shall be paid by the individual who has received any profit on cryptocurrency transactions, irrespective of whether the gain is short-term or long-term.
You'll need a "wallet" that can store your cryptocurrency to buy cryptocurrencies. In addition, you need to ensure that KYC is successfully done in the account to be eligible for purchasing cryptocurrency. In general, you open an account on a cryptocurrency exchange and then verify it and use real money to purchase cryptocurrencies like Bitcoin or Ethereum.
Cryptocurrencies are classified as Virtual digital assets and are subject to tax in India. Here’s how they are taxed -
The earnings from trading, selling, or swapping cryptocurrencies are taxed at a flat 30% (plus a 4% surcharge) for both capital gain and business income.
Other than this, a TDS at 1% is also applicable on the sale of crypto assets of transactions exceeding Rs.50,000 (or Rs.10,000 in exceptional cases).
Cryptocurrency tax calculation is now very easy with Tax2win’s cryptocurrency tax calculator.
You have to pay a tax of flat 30% on your crypto profits. Here’s how to calculate it -
Gains from crypto = Sale price - purchase price (cost of acquisition)
Crypto tax = 30% of Gains from crypto.
The following crypto transactions are subject to tax in India -
Long-term capital losses can be offset against long-term capital profits under existing tax laws. It exempts taxpayers from paying long-term capital gains taxes. However, in the case of crypto revenue, this will not be possible. Losses from the sale of digital assets cannot be offset by other income. It will be treated as a separate class of asset.
TDS on cryptocurrencies was introduced to tax the crypto traders and investors as soon as they carry out the transaction by deducting the TDS at 1% at the source. The buyer is responsible for deducting TDS @1% from the amount before remitting it to the seller. While Indian exchanges automatically deduct TDS, people trading on foreign exchanges must manually deduct TDS and file their ITR.
In the case of P2P transactions, the buyer will deduct TDS and file form 26QE or 26Q, whichever is applicable.
TDS at 1% is applicable to both buyer and seller in the case of crypto-to-crypto transactions.
NFTs, or non-fungible tokens, are cryptographic assets on the blockchain that include unique identification codes and metadata that identify them from one another.
Cryptocurrencies may appreciate in value, but many investors regard them as speculative investments rather than long-term investments. It should be noted that a currency needs stability.
Currently, there is no regulation or any kind of ban on cryptocurrencies in India. After the 2022 budget, it can be said that virtual assets like cryptos will not be banned in India but treated as another asset class. However, it is not yet clear, and the recognition of digital assets under income tax is not akin to granting legal status.
No, according to the Finance Minister, only the individual who receives cryptocurrency would be taxed. Section 194S of the Income Tax Act was added to bring such transactions into the reporting system. A rate of withholding of one percent has been recommended. Such provisions took effect on July 1, 2022.
No deductions are allowed except for the cost of acquiring digital assets. This means that a taxpayer cannot claim deductions and exemptions on the profit earned from the purchase and sale of cryptocurrencies.
