Introduction
Cryptocurrencies have emerged as a significant financial innovation, offering decentralized and borderless transactions. However, their volatility and lack of central regulation have led to debates. In India, virtual digital assets (VDAs) such as cryptocurrencies and NFTs are now subject to taxation. This guide provides a detailed overview of the taxation implications on VDAs.
What are Cryptocurrencies?
In simple terms, cryptocurrencies are digital currencies used to buy goods and services, similar to traditional currencies. Their decentralized nature means they operate without intermediaries like banks or central authorities. There are over 1,500 virtual currencies traded today, including Bitcoin, Ethereum, Litecoin, and Ripple.
Definition of Virtual Digital Assets (VDAs)
Crypto and NFTs are categorized as “Virtual Digital Assets” under Section 2(47A) of the Income Tax Act. This includes any information, code, number, or token (excluding Indian or foreign fiat currency) generated through cryptographic means. Essentially, VDAs encompass all crypto assets, including NFTs, tokens, and cryptocurrencies, but exclude gift cards or vouchers.
Are Crypto Gains Taxable in India?
Yes, gains from cryptocurrency are taxable in India. The government clarified its stance on cryptocurrencies and other VDAs in the 2022 Budget.
Key Highlights of Crypto Taxation in India
The crypto taxation framework was introduced in the Budget 2022. Here are the key points:
- Cryptocurrencies are classified as virtual digital assets.
- Gains from trading, selling, or swapping cryptocurrency are taxed at a flat 30% (plus a 4% surcharge), regardless of whether the income is treated as capital gains or business income.
- 1% Tax Deducted at Source (TDS) applies to the sale of crypto assets exceeding Rs 50,000 (or Rs 10,000 in certain cases).
Crypto Tax Highlights
If you engage in any of the following transactions, you will be required to pay a 30% tax:
Now that you know you’ll have to pay a 30% tax on your profits from crypto, let us see how to calculate the profits.
Gains are nothing but Sale Price – Cost Price.
Calculating Crypto Profits
To calculate your profits, simply subtract the cost price from the sale price:
Gains = Sale Price - Cost Price
Crypto Bookkeeping:
The computation of tax on crypto, when you have a large amount of transactions in different exchanges and wallets, will be quite complex. Thus one needs to implement crypto bookkeeping software to manage and consolidate all such transactions. This will help you generate reports like capital gain reports, Holding reports etc. It involves the following…
- Importing all transactions like deposits, withdrawals, Trades etc., from different exchanges and wallets.
- The software will automatically recognise transactions like deposits, withdrawals, staking income, trades etc.
- Pending entries for categorisation need to be classified.
- The last stage is closing balance verification. This ensures that the closing balance, as per actual holdings, matches the books.
Tax Deducted at Source (TDS) on Crypto
Tax Deducted at Source (TDS) aims to tax the crypto traders and investors as and when they carry out a transaction by deducting a certain percentage at the source. A buyer who owes a payment to the seller must subtract the TDS amount and forward it to the central government. Only the balance amount will be paid to the seller. In India, the TDS rate for crypto is set at 1%. Starting from July 01, 2022, the buyer will be responsible for deducting TDS at the 1% rate while making payment to the seller for the transfer of Crypto/NFT. If the transaction takes place on an exchange, then the exchange may deduct the TDS and pay the balance to the seller. Indian exchanges automatically deduct TDS, while individuals trading on foreign exchanges must manually deduct TDS and file their TDS returns.
: It is important to note that TDS under Section 194S is applicable at the time of purchase of VDA from an Indian Tax Resident only. Thus if you are Trading in an International exchange, DEX, you will be interacting with a non-resident or non-resident entity, then one can take a stand that Section 194S is not applicable. Non-Applicability of 194S TDS on VDA
Taxation of Airdrops
An airdrop involves distributing cryptocurrency tokens or coins directly to wallet addresses, often for free, to increase awareness and liquidity. Airdrops are taxed at 30% under “Income from Other Sources.”
- Receiving crypto: Airdrops will be taxed on the value determined as per Rule 11UA, i.e. at the fair market value of the tokens as on the date of receipt on exchanges or DEXes. Tax will be levied at 30% on such value.
- Sell, swap, or spend them later: If you sell, swap or spend those tokens later, then a 30% tax will be levied on the gains made.
Examples:
- If Mr. X receives 20,000 ABC tokens as an Airdrop on April 01 2022, but these tokens do not trade either on exchanges or DEXs. Then, no tax will be levied.
- Now, let’s assume Mr X receives 20,000 ABC tokens as an Airdrop on April 01, 2022, too, and ABC tokens are traded (exchanging, buying, or selling) on exchanges or DEXes. On April 01, 2022, the ABC token price on the exchange is ₹10.
- In this case, the tax will be charged at 30% on Rs 2,00,000 (20,000* Rs 10).
- Now, if Mr X sells these tokens at Rs 5,00,000, then Rs 2,00,000 will be considered as a cost, and the balance of Rs 3,00,000 will be taxable at 30%.
Taxation of Crypto Mining
Mining involves verifying and recording transactions on a blockchain network. Miners solve complex mathematical puzzles and are rewarded with cryptocurrency.
- Mining income is taxed at a flat 30%.
- The cost of acquisition for crypto mining is considered ‘Zero’ for computing the gains at the time of sale. No expenses such as electricity or infra cost can be included in the cost of acquisition.
- Receiving crypto: Crypto assets received at the time of mining will be taxed on the value determined as per Rule 11UA, i.e. at the fair market value of the tokens as on the date of receipt on exchanges or DEXes. Tax will be levied at 30% on such value.
- Sell, swap, or spend them later: If you sell, swap or spend those assets later, a 30% tax will be levied on the gains made.
Taxation of Crypto Staking
If you stake cryptocurrency, you may have to pay taxes on your earnings. The amount you earn from staking depends on the Annual Percentage Rate (APR) offered by the validator. For instance, if you stake 100 coins with a 10% APR, you will earn 10% interest every year.
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.
In general, transferring your coins to a staking pool or wallet does not typically attract taxes. Additionally, moving assets between wallets is often considered tax-exempt.
Taxation of Crypto Gifts
Tax treatment on gifts differs depending on whether it is money, immovable property or movable property. In Budget 2022, VDAs were included within the scope of movable properties. Therefore, crypto gifts received will be taxed as ‘income from other sources’ at regular slab rates if the total value of gifts is more than Rs 50,000.
Cryptos can be gifted either through gift cards, crypto tokens or crypto paper wallets.
Crypto received as gifts from relatives will be tax-exempt. However, if the value of the crypto gift from a non-relative exceeds Rs 50,000, it becomes taxable. Gifts received on special occasions, through inheritance or will, marriage, or in contemplation of death, are also exempt from taxes.
Offsetting Crypto Losses
As per Section 115BBH, losses incurred in crypto cannot be offset against any income, including gains from cryptocurrency. So, a crypto investor cannot off set previous year losses from a crypto asset while filing ITR this year.
Moreover, Indian investors in cryptocurrency are not permitted to claim expenses related to their crypto activities, except for the acquisition cost or purchase cost.
Example:
Mr. X purchased Rs 60,000 worth of Bitcoins and later sold it for Rs 80,000. He also bought Ethereum worth Rs 40,000 and sold them for Rs 30,000. The exchange charged a trading fee of Rs 1,000. The tax on both these transactions shall be computed as under:
| Sell (in Rs) | Tax Amount | ||||
|---|---|---|---|---|---|
| Bitcoin | 60,000 | 80,000 | 20,000 | 30% | 6,000 |
| Ethereum | 40,000 | 30,000 | (10,000) | 30% | – |
| Total | 6,000 |
Here, Rs 10,000 loss is not allowed to be offset against the gains of Rs 20,000. The entire Rs 20,000 income is taxed at 30%. Also, the trading fee of Rs 1,000 is not allowed as a deduction.
MCA Mandate on Disclosure of Crypto Gains and Losses
Ministry of Corporate Affairs (MCA) has made it mandatory to disclose gains and losses in virtual currencies in notes to accounts of Company Financial statements. Also, the value of cryptocurrency as of the balance sheet date is to be reported. Accordingly, changes have been made in schedule III of the Companies Act starting from 1 April 2021. This mandate can be considered as the first move of the government towards regulating cryptocurrencies.
Please note that this mandate is only for companies, and no such compliance is required from individual taxpayers. However, reporting and paying taxes on the gains of cryptocurrency is a must for all.
For Individuals, whether crypto assets need to be declared in the Asset and liability schedule or not is an unanswered question. In Schedule Asset and Liability, currently, there is no specific field for disclosure of your Crypto holdings.
Quick Reference Table for Crypto Taxation
| Buying crypto | 1% Tax Deducted at Source (TDS) by the exchange (excluding international & P2P trades) |
| Selling crypto | 30% tax on any capital gains |
| Trading crypto for crypto | 30% tax on any gains |
| Holding crypto | Generally tax-free, but subject to capital gains tax upon disposal |
| Moving crypto between your own wallets | Generally tax-free; ensure proper documentation for audit trails |
| Airdrops of crypto | Considered as income at your applicable tax rate; 30% tax if later sold |
| Hard forks | Income Tax at your applicable tax rate upon receipt; 30% tax if later sold |
| Gifts of crypto | The recipient will be subject to tax; exemptions is for gifts from close family |
| Donating crypto | Only cash donations are tax deductible; any perceived profits may be subject to 30% tax |
| Mining rewards | Income Tax at your individual tax rate; 30% tax if later sold |
| Staking rewards | Income Tax at your individual tax rate; 30% tax if later sold |
Timeline of Crypto Regulations in India
| 2013 | A circular was released by the RBI which advised investors to exercise caution when considering speculative investments, including cryptocurrencies. |
| 2018 | Despite the RBI’s numerous warnings, the Indian crypto markets continued to gather momentum and attracted a record number of users. In order to prevent this trend from taking a huge leap, the RBI released a circular in April 2018, restricting banking facilities to the crypto exchanges. |
| 2020 | After a nearly two-year legal battle, the Indian Supreme Court ultimately overturned RBI’s order, ruling that it was unconstitutional to prohibit trading in cryptocurrencies without any regulatory framework in place. This landmark decision played a significant role in igniting the crypto boom of 2020 and marked a crucial turning point for the struggling Indian crypto market. |
| 2022 | Union Budget 2022 introduced crypto tax regulations, most important of them being a flat 30% tax on crypto and 1% TDS on sell transactions. |
Calculating Your Crypto Tax
In India, gains from cryptocurrency are subject to a 30% tax (along with applicable surcharge and 4% cess) under Section 115BBH.
As discussed above, the taxation of crypto gains is determined by the type of transaction.
Reporting Crypto Taxes in ITR Forms
For the financial year 2023-24 and assessment year 2024-25, you will need to declare your cryptocurrency taxes using either the ITR-2 form (if reporting as capital gains) or the ITR-3 form (if reporting as business income). The new ITR forms include a specific section ‘Schedule VDA’ for reporting cryptocurrency gains or income.
How to Save on Crypto Tax
It is always advised to report your crypto income as per section 115BBH at 30% and also TDS is charged under 194S on transfer. However, to save tax on crypto you can opt for tax advantaged accounts, deductions can be claimed, proper records, and you can also approach a CA or use our Contact us Tab for a discussion with Tax Consultant to understand more on this.
Crypto-Friendly Countries
United Arab Emirates, HongKong, Malaysia, Singapore, Switzerland, Georgia, Cayman Islands, Slovenia, British Virgin Islands, Malta, El Salvador, and Peurto Rico are the countries on which crypto is tax free.
Where to Report Crypto Gains in ITR
Under Schedule VDA, crypto gains can be reported in your ITR.
Disclaimer: This guide is for informational purposes only and does not constitute financial or legal advice. Consult with a qualified professional for personalized advice.
