Understanding Cryptocurrency Taxation in India

In the realm of financial evolution, cryptocurrencies have emerged as a disruptive force, transforming the way we perceive and interact with money. With the rise in popularity of cryptocurrencies like Bitcoin and Ethereum, it has become imperative to comprehend the tax implications associated with these digital assets in India. In this comprehensive guide, we shed light on the taxation of cryptocurrencies in India, offering insights and guidance on how to navigate this complex landscape.

Introduction to Cryptocurrency

Cryptocurrency is a digital or virtual form of currency that utilizes cryptography for security. Unlike traditional currencies issued by governments, cryptocurrencies operate on decentralized blockchain technology, making them immune to central authority control. Bitcoin, Ethereum, Ripple, and Litecoin are some of the prominent cryptocurrencies in circulation today.

The Legal Framework

The Reserve Bank of India’s (RBI) Stance

The Reserve Bank of India (RBI) has maintained a cautious approach towards cryptocurrencies. In April 2018, the RBI issued a circular that banned financial institutions from providing services related to cryptocurrencies. However, this circular was challenged in the Supreme Court of India and was subsequently lifted in March 2020, opening up the path for cryptocurrency trading.

Cryptocurrency Regulation

While cryptocurrencies are not yet considered legal tender in India, they are not explicitly banned either. The government has indicated its intent to regulate the crypto market through the introduction of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. This bill aims to create a framework for the issuance of an official digital currency while regulating private cryptocurrencies.

Income Tax on Cryptocurrency

Cryptocurrency transactions in India are subject to income tax. Here’s a breakdown of the key tax aspects:

1. Capital Gains Tax: Cryptocurrency transactions fall under the purview of capital gains tax. Profits earned from selling cryptocurrencies are categorized as either short-term or long-term capital gains, depending on the holding period.

• Short-term capital gains (STCG) are taxed at the individual’s applicable income tax slab rate.
  • Long-term capital gains (LTCG) are taxed at a flat rate of 20% with indexation benefits.

• Taxation of Mining: Cryptocurrency miners must report the rewards received as income and pay tax accordingly.
• Tax on Cryptocurrency Gifts: Gifting cryptocurrencies may attract tax liabilities, depending on the value and relationship between the parties involved.

Goods and Services Tax (GST)

Cryptocurrencies are subject to Goods and Services Tax (GST) in India. The GST rate is usually 18% and is applicable to cryptocurrency-related services such as trading and exchange platforms.

Reporting and Compliance

Individuals engaged in cryptocurrency transactions are required to maintain meticulous records of their activities. Failing to report cryptocurrency holdings and transactions accurately can result in penalties and legal consequences.

Is crypto tax in India?

Cryptocurrency and NFTs, known as Virtual Digital Assets (VDAs) under the Income Tax Act in India, have gained significant attention in recent years. To put it simply, VDAs encompass a wide range of digital assets, including cryptocurrencies and NFTs, which are created and validated using cryptographic methods. However, it’s important to clarify that this category doesn’t include items like gift cards or passes.

Now, let’s dive into how cryptocurrency is taxed in India. Cryptocurrency is considered a virtual digital asset and is subject to taxation. When you engage in buying and selling cryptocurrency, the income generated from these transactions is taxed at a rate of 30%, along with a 4% cess, as per section 115BBH. Additionally, starting from July 1, 2022, section 194S mandates a 1% tax deducted at source (TDS) on crypto asset transfers if the transaction exceeds a certain threshold, typically 50,000 INR (although it can be 10,000 INR in specific cases) within the same financial year.

It’s crucial to note that these cryptocurrency taxes apply to all investors, whether they are private individuals or corporate entities, who engage in digital asset transfers throughout the year. The tax rate remains consistent for both short-term and long-term gains, covering all types of income derived from cryptocurrency investments.

In essence, India’s tax framework for cryptocurrency aims to ensure that individuals and businesses involved in virtual digital asset transactions contribute their fair share to the tax system, thereby promoting transparency and compliance in the burgeoning world of digital assets.

Transactions of Crypto are liable to tax in India?

Transaction Type	Tax Rate
Spending Cryptocurrency to purchase goods/services	30%
Swapping Cryptocurrency for other Cryptocurrency	30%
Converting Cryptocurrency to Fiat (e.g., INR)	30%
Receiving Cryptocurrency as payment for services	30%
Receiving Cryptocurrency as a gift	30%
Mining Cryptocurrency	30%
Receiving Cryptocurrency as Salary	30%
Staking Cryptocurrency and earning staking rewards	30%
Receiving Cryptocurrency Airdrops	30%

TDS (Tax Deducted at Source) for Cryptocurrency	Details
TDS Definition	Tax Deducted at Source (TDS) is a mechanism where a certain percentage of tax is deducted by the buyer while making payments to the seller, and this deducted amount is forwarded to the central government.
TDS Rate for Crypto	The TDS (Tax Deducted at Source) for cryptocurrency transactions in India is established at a standard rate of 1%. However, it’s important to note that TDS is charged based on Section 194S of the Finance Bill of 2022. In some cases, if a specific user falls under Section 206AB, higher TDS rates may apply.
Effective Date	Starting from July 01, 2022, TDS on cryptocurrency transactions became applicable.

When cryptocurrency taxes are deducted at a rate higher than 1%?

It’s crucial to understand that if a user has not filed their Income Tax Return for the past two years and the total Tax Deducted at Source (TDS) amount for each of those years equals or exceeds ₹50,000, the TDS rate for transactions involving cryptocurrencies will be raised to 5%.

When is TDS applicable to cryptocurrencies?

TDS is applicable when making a sale and/or transfer of virtual digital assets on a crypto trading platform. The trading platform will deduct the amount and forward it to the relevant tax authorities on behalf of users.

Transaction Type	TDS Applicability on Vauld
Sale of Cryptocurrency for INR	TDS is applicable.
Buying Cryptocurrency with Cryptocurrency	TDS is applicable.
Swapping/Trading Cryptocurrency	TDS is applicable.
Automated Investment Plan (AIP) buys with Cryptocurrency	TDS is applicable.
Liquidating/Paying back a loan using collateral token	TDS is applicable.
Buying Cryptocurrency with INR	TDS is not applicable.
Depositing INR on Vauld	TDS is not applicable.
Depositing Cryptocurrency on Vauld	TDS is not applicable.
AIP buys with INR	TDS is not applicable.
Transferring Cryptocurrency between Vauld accounts	TDS is not applicable.
Transferring Cryptocurrency outside the Vauld account	TDS is not applicable.
Taking a loan	TDS is not applicable.
Paying back a loan using the loan token	TDS is not applicable.

When TDs apply, when they do not

TDS Applicability	TDS Applies	TDS Does Not Apply
Buying crypto with INR	No	Yes
Depositing INR on Vauld	No	Yes
Depositing crypto on Vauld	No	Yes
AIP (Automated Investment Plan) buys with INR	No	Yes
Transferring crypto between Vauld accounts	No	Yes
Transferring crypto outside the Vauld account	No	Yes
Taking a loan	No	Yes
Paying back a loan using the loan token	No	Yes
Selling crypto for INR	Yes	No
Buying crypto with crypto	Yes	No
Swapping/Trading crypto	Yes	No
AIP (Automated Investment Plan) buys with crypto	Yes	No
Liquidating/paying back a loan using collateral token	Yes	No

Here’s the example of how TDS (Tax Deducted at Source) is applied when selling cryptocurrency for INR (Indian Rupees) presented in a table format:

Transaction Details	Amount
Token/Currency	BTC/ INR
Conversion Rate (1 BTC to INR)	10,00000 INR
Transaction Fee	100 INR
Amount Post Fee	999900 INR
TDS Deducted (1%)	9999 INR
Balance Credited (in INR)	989901 INR

In this example:

• You are selling 1 Bitcoin (BTC) for 10,00000 INR.
• A transaction fee of 100 INR is deducted.
• After deducting the transaction fee, the amount post-fee is 999900 INR.
• TDS is applied at a rate of 1%, which amounts to 9999 INR.
• The balance credited to your account is 989901 INR after deducting the TDS.

It’s important to note that this TDS treatment applies not only to selling Bitcoin but also to other cryptocurrencies and various transaction types, including swapping and AIPs involving cryptocurrencies. TDS is separately deducted for AIPs of a basket of cryptocurrencies at each purchase.

What happens to the deducted TDS?

Your TDS will be paid to the Government of India on a monthly basis and filings will be made on a quarterly basis.

Here’s the information regarding the taxation of various cryptocurrency activities in India:

Cryptocurrency Activity	Taxation Details
Profit Calculation	Gains are calculated as Sale Price – Cost Price.
Tax on Airdrops	– Airdrops are taxed at a rate of 30%. – Tax on received crypto: Airdrops are taxed based on the fair market value of the tokens at the date of receipt on exchanges or DEXes, at a 30% rate. – Tax on selling, swapping, or spending airdropped tokens: 30% tax is levied on gains.
Tax on Mining Cryptocurrency	– Mining income is taxed at a flat rate of 30%. – Cost of acquisition for crypto mining is considered as ‘Zero.’ No expenses such as electricity or infrastructure costs can be included in the cost of acquisition.
Tax on Crypto Staking/Forging	– Income from staking is taxed at 30%. – When selling the crypto asset, a 30% Capital Gains Tax is applicable. – Transferring coins to a staking pool or wallet is generally tax-exempt. Moving assets between wallets is often considered tax-exempt.
Tax on Crypto Gifts	– Crypto gifts are treated as ‘income from other sources’ and taxed at regular slab rates if the total value of gifts exceeds Rs 50,000. – Gifts from relatives are tax-exempt. – Gifts on special occasions, inheritance, marriage, or in contemplation of death are also exempt.
Loss from Crypto Transactions	– Losses from crypto transactions cannot be offset against any income, including gains from cryptocurrency. – Expenses related to crypto activities are generally not allowed as deductions, except for acquisition or purchase costs.

Here’s an example illustrating the taxation of crypto transactions:

Currency	Buy (in Rs)	Sell (in Rs)	Net Profit or (Loss)	Tax Rate	Tax Amount
Bitcoin	1200000	1600000	400000	30%	120000
Ethereum	800000	750000	(50000)	30%	–
Total					120000

In this example, a loss of Rs 50000 from Ethereum cannot be offset against the gains from Bitcoin. The entire income of Rs 120000 is taxed at a rate of 30%. Additionally, trading fees are generally not allowed as deductions.

Disclosure of Crypto Assets

Disclosure of Crypto Assets	Details
Regulatory Mandate	The Ministry of Corporate Affairs (MCA) has mandated the disclosure of gains, losses, and the value of cryptocurrency holdings as of the balance sheet date.
Applicability	This regulatory requirement applies exclusively to companies operating under the Companies Act in India. Individual taxpayers are not subject to this specific mandate.
Effective Date	The changes to Schedule III of the Companies Act, which include the crypto asset disclosure, came into effect on April 1, 2021.
Government’s Move Towards Regulation	This mandate can be seen as one of the government’s initial steps towards potential regulation and oversight of cryptocurrencies in India, with a focus on corporate entities.
Tax Reporting for Individuals	While individuals are not required to comply with this specific corporate mandate, they are obligated to report and pay taxes on any gains from cryptocurrency transactions.

Conclusion

In the ever-evolving landscape of cryptocurrency, understanding the taxation framework in India is crucial to ensure compliance with the law and avoid legal consequences. While the Indian government is yet to provide a definitive stance on cryptocurrencies, it is essential for individuals and businesses involved in the crypto market to stay informed about the latest regulatory developments and tax obligations. Seeking professional advice is strongly recommended to navigate this complex terrain effectively.