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Cryptocurrency Taxation in India - Guide to Crypto Taxes in India 2024
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. After 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.
What is Cryptocurrency?
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.
Is Crypto Taxed in India?
Yes, cryptocurrency is liable to tax in India. In the 2022 budget, new rules related to the taxation of cryptocurrencies have been introduced.
Flat 30% Tax on Profits:
Since FY 2022-23, a flat 30% tax is levied on crypto gains, irrespective of your income bracket. Profits are taxed equally, with no differentiation between short-term and long-term gains. The new ITR forms now include Schedule - Virtual Digital Assets (VDA) for reporting crypto/NFT-related gains.
TDS at 1%:
A 1% TDS applies to transactions exceeding ₹10,000 (or ₹50,000 in specific cases) in a financial year. This is automatically deducted by the exchange during transactions, eliminating extra paperwork.
Whether you’re a private investor, a trader, or simply receiving crypto as a gift, every transfer and transaction may be taxed. Additionally, crypto gifts, mining, staking rewards, and airdrops are all considered taxable.No deduction is allowed except for the cost of acquisition.
How do I invest in cryptocurrency?
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 to purchase 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.
How is Cryptocurrency Taxed in India?
Cryptocurrencies are classified as Virtual digital assets and are subject to tax in India. Here’s how they are taxed -
- The gains from trading cryptocurrencies are subject to tax at 30% (plus 4% cess) as per section 115BBH.
- Any transfer of crypto assets on or after 1 July 2022 for an amount of Rs.50000 or Rs.10,000 in some cases is subject to a Tax deducted at source (TDS) at 1% under section 194S.
- The transfer of crypto assets during a year by investors, either private or commercial, is subject to crypto tax.
- The tax rate on short-term and long-term gains is the same, and it applies to all types of incomes.
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.
How to Calculate Tax on Crypto?
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.
Which Crypto Transactions Are Liable to Tax in India?
The following crypto transactions are subject to tax in India -
- Spending cryptocurrencies to purchase goods and services
- Exchanging cryptocurrencies for other cryptocurrencies.
- Trading cryptocurrencies using Fiat currency like INR.
- Receiving cryptocurrency as payment for service.
- Receiving cryptocurrency as a gift
- Cryptocurrency mining
- Drawing a salary in crypto
- Staking crypto and earning the benefits of a stake
- Receiving airdrops
TDS on Crypto Transactions
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.
Tax on Mining Cryptocurrency
Mining income in cryptocurrency is subjected to taxation at a flat rate of 30% based on the fair market value of the cryptocurrency at the time of mining. However, it's important to note that there is no provision for deductions related to mining expenses, such as electricity or hardware costs. The taxation process for mining income involves a straightforward application of the 30% rate on the cryptocurrency's fair market value during the mining period.
When it comes to selling mined cryptocurrency, capital gains tax is applicable on any profit realized from the sale, swap, or expenditure of the mined digital assets. It's essential to recognize that the cost basis for calculating capital gains is considered zero. This implies that there is no allowance for deducting mining expenses to reduce the taxable gain associated with the sale or disposal of the mined cryptocurrency. The taxation of the proceeds from selling mined cryptocurrency follows capital gains tax rules but with the distinctive feature of a zero-cost basis for these mined assets.
Tax on Airdrops
An airdrop is a method of distributing cryptocurrency tokens directly to specific wallet addresses, which is mostly for free. It is commonly used to create awareness and boost liquidity in the early stages of a new cryptocurrency. However, airdrops are taxable at 30% under the Income Tax Act and fall under the category of Income from Other Sources.
Tax on Crypto Staking/Forging
Cryptocurrency forging means generataing 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. 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.
Tax on Crypto Gifts
In Budget 2022, virtual digital assets were included within the scope of movable properties. Hence, the crypto gifts received taxed as ‘income from other sources’ at regular slab rates if the total value of gifts is more than Rs 50,000. Similarly, if relatives receive crypto as a gift, it will be tax-exempt.
Restrictions on Loss Set-Off for VDA Transactions under the Income Tax Act
The Income Tax Act explicitly prohibits the set off of losses incurred from the transfers of Virtual Digital Assets (VDAs) against income or gains derived from other VDAs. For instance, if an individual sells a cryptocurrency and experiences a loss, this loss cannot be set off against a gain made from the transfer of another VDA. To illustrate, if Chirag sells Bitcoin at a loss of ₹15,000 and subsequently sells units of another cryptocurrency, making a profit of ₹40,000, A would be taxed on the entire profit of ₹40,000 from the sale of the other cryptocurrency. Unfortunately, Chirag would not be allowed to set off the loss of ₹15,000 incurred on the Bitcoin against this profit.
Basically, the Income Tax Act treats gains and income from Virtual Digital Assets as taxable. However, no relief or provision is provided in the event of losses incurred. As a result, Virtual Digital Assets are subject to different taxation rules than most other assets in India, emphasizing the distinct treatment of these assets under the Income Tax Act.
Earn income from trading cryptocurrencies? Our tax experts can help you calculate tax on your earnings from trading crypto. Furthermore, it is important to show crypto gains while filing your ITR. Connect with the Tax2win tax experts to file your ITR today.
Frequently Asked Questions
Q- Are NFT (Non-fungible tokens) and cryptocurrency the same?
NFTs, or non-fungible tokens, are cryptographic assets on the blockchain that include unique identification codes and metadata that identify them from one another.
Q- Are cryptocurrencies a good investment?
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.
Q- Is Cryptocurrency legal in India?
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 will be 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.
Q- Will I be taxed if I give someone a Bitcoin?
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.
Q- Are Exemptions Available for Cryptocurrencies Transaction Profit?
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.
Q- Has there been any change in Budget 2024 on the TDS and tax rate on crypto F&O transactions?
No, the tax treatment for crypto futures and options has not been changed. Crypto transactions continue to attract TDS at @1% a and the crypto gains will still be taxed at a flat 30%. While the Budget 2024 introduced changes to the STT rates for F&O transactions in securities, these changes do not apply to crypto transactions, as crypto transactions are categorized as commodities.
Q- What does the law say about TDS deduction from crypto VDA transactions?
Section 2(47A) of the IT Act covers all crypto assets like cryptocurrencies, NFTs, and tokens.
- Tax on Gains: Under Section 115BBH, a 30% tax is applicable on gains from trading cryptocurrencies. This applies to private investors, professional traders, and anyone involved in digital asset transactions.
- TDS on Transactions: As per section 194S, a 1% TDS is applicable on cryptocurrency transactions to ensure all transactions are recorded. 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.
Q- Is TDS deducted from crypto futures and options (F&O) transactions done in Indian and foreign exchanges?
TDS is applicable to crypto futures and options transactions conducted on both Indian and foreign exchanges under specific conditions. Here’s a detailed breakdown:
TDS on Crypto F&O Transactions on Indian Exchanges
Applicability: Section 194S requires the deduction of 1% TDS on the transfer of Virtual Digital Assets, including cryptocurrencies and crypto derivatives such as futures and options.
Thresholds:
- ₹50,000: Applicable to specified persons such as individuals or Hindu Undivided Families (HUFs) whose accounts need to be audited under the Income Tax Act.
- ₹10,000: Applicable to other individuals who do not fall under the category of specified persons.
Q- Is TDS deducted from crypto F&O perpetual contract transactions done in Indian and foreign exchanges?
The Union Budget 2022 mandated a 1% TDS on transfers of Virtual Digital Assets (VDAs), such as cryptocurrencies and perpetual contracts, starting July 1, 2022.
For specified individuals or HUFs who are required to audit their accounts under the Income Tax Act, TDS applies if their VDA transactions exceed ₹50,000 in a financial year. For others, the threshold is ₹10,000.
Q- Is crypto F&O, crypto F&O perpetual contract transactions both taxed at flat 30% rate plus cess?
- Trading Gains/Losses: Profits from trading crypto F&O perpetual contracts are usually classified as speculative business income.
- Capital Gains: Depending on the nature and frequency of transactions, some may be treated as capital gains. However, most active traders will have their gains considered as business income.
- Tax Rates -
Business Income: Income from trading is added to your total income and taxed according to your applicable income tax slab rate.
Capital Gains: If considered capital gains, the tax rate varies based on whether the gains are short-term or long-term. Crypto assets held for less than 36 months are typically seen as short-term and taxed at the individual’s slab rate. Long-term gains may attract a lower tax rate.
