Cryptocurrency Taxation in India - Guide to Crypto Taxes in India 2023 (2024)

Budget 2023 Crypto Tax Update

Disclosure of Crypto Assets in Schedule VDA

Following are the latest updates in respect of disclosure of crypto assets in ITR -

• The new ITR forms for F.Y. 2023-24 consist of a separate section called Schedule - Virtual Digital Assets (VDA). This schedule has to be used for reporting your gains from all virtual digital assets like NFTs and cryptos.
• Indian investors who trade in cryptocurrencies and NFTs must declare their income from crypto/NFTs as capital gains if they hold them as investments. However, the NFTs and cryptos held for trading purposes are considered business income.

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. 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.

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

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.

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.

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.