How Cryptocurrencies Are Taxed In India?

A decentralized digital asset and a medium of exchange based on blockchain technology are both what are referred to as cryptocurrencies.

Clarification on proposed Section 115BBH in Budget 2022

1. It is not possible to offset losses from one virtual digital currency against gains from another.
2. Infrastructure expenses for mining digital currency will not be considered acquisition costs.

Union Budget 2022 Outcome

1. The tax rate for income from the transfer of virtual digital assets, such as cryptocurrency and nonfungible tokens (NFTs), is 30%.
2. When declaring revenue from the transfer of digital assets, there will be no deductions permitted besides the cost of purchase.
3. Digital asset losses cannot be offset by any other revenue.
4. Giving away digital assets will subject the recipient to tax.

It is not possible to offset losses from one virtual digital currency against gains from another.

Cryptocurrencies are, to put it simply, digital money that can be used, like our other fiat currencies, to purchase goods and services. Due to its decentralized character, or the fact that it operates without the aid of intermediaries like banks, financial organizations, or centralized authorities, it has, however, consistently generated controversy since its inception.

More than 1500 virtual currencies are exchanged now in the realm of digital currencies, including Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic, and others. Since the nationwide lockout, the volume of cryptocurrency investments and trades has skyrocketed. Despite any specific regulation from the Indian government or Reserve Bank of India (RBI), cryptocurrency investments have increased.

Legality of cryptocurrency

The Indian government has not yet given cryptocurrencies the status of legal money.

The RBI attempted to enact a ban in 2018 by limiting banking services to cryptocurrency exchanges. However, the Supreme Court rejected the ban because it violated constitutional principles and the rights of virtual exchanges.

The income tax agency has not yet provided any clarification regarding the tax ramifications for gains made through cryptocurrency transactions.

Is crypto a “currency” or an “asset”?

Tax professionals have been debating whether to classify cryptocurrencies as “assets” or “currencies.” The terms “cryptoassets” and “cryptocurrency” are frequently used interchangeably.

It would be safe to describe it as an“asset/property” in the lack of legal support from the government to define it as a “currency.”

Classifying them as “assets” would be a better course of action than any official clarification because the tax implications would exist regardless of their juridical status.

The US government also published a notification defining cryptocurrencies as “property” and charging capital gains taxes on gains from their sale.

Taxation on the gain from the sale of crypto

The cryptocurrency cannot avoid taxation because it has not yet been legalized by the RBI. An investor who sells cryptocurrencies and makes money must pay income tax.

Except for those explicitly exempted by the Income Tax Act, all income is subject to taxation. Investors must pay income tax on the cryptocurrency transactions based on the nature of the transactions until we obtain any clarification from the income tax department.

The gains from the crypto-transactions would be subject to taxation as either

(i) business income or

(ii) capital gains under the regular income tax rules.

The goal of the investors and the nature of these transactions will determine this categorization.

Gains from bitcoin transactions will be taxed as “business income” if there are a lot of frequent trades and large volume.

They will, however, be taxed as “capital gains” if the primary reason for ownership is to gain from a longer-term increase in value with fewer exchanges.

If classified under capital gains:

Cryptocurrency transactions that are categorized as “investments” will be treated as capital gains or losses under the category of “capital gain.”

A transaction is deemed to have a “capital gain” if the sale price exceeds the cost, while a transaction has a “capital loss” if the price is higher than the sale price.

If crypto assets are kept for less than three years (=36 months), short-term capital gains tax may be due according to the appropriate income tax slabs. If cryptoassets are sold after three years (> 36 months) of holding the investment, they will be classified as long-term investments and subject to a 20% tax rate with an indexation advantage.

In case of capital losses:

The income tax authorities have not issued a directive on how capital losses should be handled. However, if your selling transaction has left you with a loss, we advise that you speak with a professional.

If classified as business income:

When deciding whether to declare cryptocurrency transactions as company income, it’s important to consider how the goods and services tax (GST) regulation may be affected. All direct and indirect costs may reduce profits from the sale of crypto assets. The earnings will be taxed at the respective income tax slab rates after being added to the other income.

GST angle if treated as business income:

The supply of goods or services, or both, is the taxable event for GST implications. The idea of supply is broad and involves a lot of different kinds of interactions.

Anything other than goods, securities, and money is referred to as “services.” It comprises actions involving the use of money or its conversion into cash or into any other form of payment that requires a separate consideration.

With the aforementioned definition in mind, purchasing and selling cryptocurrencies as a supply of goods or services may trigger the application of GST.

The Central Economic Intelligence Bureau (CEIB) has made a proposal to classify cryptocurrencies as intangible assets and impose GST on all cryptocurrency transactions.A general rate of 18% may likely apply going forward since the plan is still being discussed and the government has not yet determined its taxability.

If your revenue is above Rs 20 lakh, you might need to think about paying GST on your revenue.For more information, speak with an expert.

If classified as other sources of income:

When submitting an income tax return (ITR), cryptocurrency assets can potentially be included as “income from other sources” and taxed accordingly. The total income is increased by any additional income, which is then taxed according to the taxpayer’s tax bracket.

There are further arguments in favor of taxing cryptocurrency asset income at the highest tax rate and treating it as “speculation business revenue.”However, taxpayers can benefit from treating it as capital gains or regular business income until the income tax authorities provide clarification.

It is imperative to declare gains in the ITR and pay taxes on them even though the income tax agency has not provided any clarification.

Disclosure of crypto assets in schedule of assets and liabilities:

Disclosure of gains and losses in virtual currency is required for compliance with Ministry of Corporate Affairs (MCA) regulations. Additionally, the price of cryptocurrencies on the date of the balance sheet must be disclosed. As a result, beginning on April 1, 2021, revisions will be made to schedule III of the Companies Act. This requirement can be viewed as the government’s initial step toward regulating cryptocurrencies.

Crypto tax filing in India: Key points explained

The Union Budget 2022 planned to designate cryptocurrencies as virtual digital assets, which would result in cryptocurrency taxes in India (FY 2022–2023). Cryptocurrencies are classified as assets, but their tax classification differs from that of traditional assets. A person is required to pay a flat 30% tax under the new crypto tax law on revenue derived from the transfer of cryptocurrencies and other virtual digital assets, such as NFTs.

According to Archit Gupta, the founder and CEO of Clear (previously Cleartax), the taxpayer is only permitted to deduct the cost of acquisition from the sale price of a crypto asset. The government recently stated that the cost of the mining infrastructure would not be factored into the acquisition cost calculation.

Crypto tax rule: No set-off of losses allowed 

Losses cannot be adjusted within a single head, i.e., they cannot be offset against income from another Virtual digital asset (VDA). Gupta gave an example to illustrate this point: If you have a loss from the transfer of bitcoin and a profit from the transfer of non-fiat currencies, you cannot deduct the loss from the transfer of bitcoin from the profit on the transfer of NFTs. Your tax obligation for NFT transfer profits is a fixed rate of 30%.

Additionally, losses from cryptocurrency transfers cannot be offset by earnings under any other heading. This means that losses from cryptocurrency cannot be offset by gains from the sale of stocks, mutual funds, assets like real estate, etc.

Crypto tax rule: No carry forward allowed

The taxpayer is prohibited from carrying forward bitcoin losses under the crypto tax rules.

According to Gupta, a loss from the transfer of cryptocurrency during one fiscal year cannot be carried over to the following year to offset gains from subsequent years.

Crypto tax filing date: When will you have to pay 30% crypto tax?

From Assessment Year 2023–2024, the taxpayer will be required to pay a 30% tax on cryptocurrencies and other VDAs. Your whole VDA transfer revenue for the upcoming fiscal year (2022–2023) will therefore be subject to a 30% tax rate.

According to Gupta, crypto investors should determine their advance tax burden after taking into account the tax on revenue from the transfer of cryptocurrencies and NFTs and pay the advance tax installments in accordance with that calculation.

Tax on exchange of crypto in business transaction

VDAs, as defined by the government, are not money.

“However, unlike how it is defined for capital assets in the Income Tax Act, the term “transfer” is not defined in reference to virtual digital assets. The definition of “transfer” in the law must be made clear, as well as whether such transactions that involve the payment of goods or services in cryptocurrency are included.

“The tax deducted as source (TDS) provision will apply here,” he continued, “if the legislation defines considering such transactions under the meaning of “transfer.” As a result of the transfer taking place, the individual transferring the cryptocurrency will be compelled to deduct TDS. In the hands of the person transferring the cryptocurrency, such an event will be taxed.

Additionally, the company will be obliged to disclose receipts based on the fair market value (FMV) of cryptocurrency accepted in payment for products or services. A transfer of cryptocurrency will occur if the company sells or otherwise transfers these digital currencies, and tax will need to be paid on that transfer.

Tax on crypto/NFT airdrops or gaming coins

Companies in the crypto and NFT sectors frequently employ airdrops to publicize the beginning of their projects. Similar to getting a coupon with a discount code in your inbox, airdrops work similarly.

According to the framework of the Income Tax Act, “Such crypto airdrops or coins gained through gaming may be regarded as gifts, and such presents are taxable in the hands of the recipient,” claimed Gupta.

Tax on crypto received as gift

The definition of “specified movable assets” has also been enlarged by the government to include “virtual digital assets.” As a result, gifts received in the form of cryptocurrency assets would be subject to taxation if their fair market value exceeded Rs 50,000.

Gupta asserted that the plain meaning of the regulations governing cryptocurrency taxes indicates that gifts received from relatives or on particular occasions will be excluded from taxation.

The majority of cryptocurrencies are convertible virtual currencies, according to the Internal Revenue Service (IRS). They can therefore be used in place of real money and serve as a medium of exchange, a store of value, a unit of account, and a unit of worth.

Additionally, it implies that any earnings or revenue derived from your cryptocurrencies are taxed. However, there is a lot to understand about how cryptocurrency is taxed because, depending on the circumstances, you might or might not owe taxes. Knowing when you will be taxed is crucial if you own or use cryptocurrencies so that you are not taken aback when the IRS comes to collect.

• Just like with a share of stock, if you sell bitcoin for a profit, you must pay capital gains taxes on that profit.
• You must pay taxes on the difference between the price you paid for the cryptocurrency and its value at the time you spent it if you use it to purchase goods or services.
• You must declare bitcoin income as business income if you accept it in exchange for products or services.
• If you mine cryptocurrencies, the price at which they were created counts as your income.

When is cryptocurrency taxed?

You do not need to pay taxes to own a cryptocurrency; they are tax-free on their own. Because the IRS views cryptocurrencies as property for taxation purposes, you must pay taxes on them when you sell or use them in a transaction.

If you receive cryptocurrency as payment for business reasons, it is taxed as business income because you incur capital gains or losses if its market value has changed.

How do cryptocurrency taxes work?

When used as payment or cashed in, cryptocurrencies cause tax events because the IRS considers them to be assets. You must pay taxes on any gain you make when you sell, swap, or use cryptocurrency that has appreciated in value.

For instance, you would owe taxes on the $2000 gain at the short-term capital gains tax rate if you purchased 1 BTC for $6000 and sold it for $8000 three months later. The sale of assets held for less than a year results in profits that are taxed at your standard tax rate. Depending on your salary, that amounts to 0 to 37% for the 2022 tax year.

You would be required to pay long-term capital gains taxes if the same trade occurred a year or more after the cryptocurrency purchase. That would be 0%, 15%, or 20% for the 2022 tax year, depending on your total taxable income.

Cryptocurrency taxes function similarly to taxes on other assets or property in this sense. When they are used and gains are earned, they cause taxable events for the owners. Therefore, the most important aspect of comprehending crypto taxes is the occurrences that result in the taxes.

Types of cryptocurrency tax events

Taxable events related to cryptocurrency include:

• Trading cryptocurrencies for fiat currency
• Paying for products, services, or real estate
• Trading cryptocurrencies for one another
• Receiving mined or forked cryptocurrencies

Nontaxable events

The following are not taxable events according to the IRS:

• Making a gift of bitcoin to a third party (subject to gifting exclusions)
• Purchasing cryptocurrency using fiat currency
• Donating cryptocurrency to a tax-exempt nonprofit or charity
• Cryptocurrency exchange between wallets

Examples of cryptocurrency tax events

Make a purchase with crypto

With cryptocurrency, buying something is simpler than ever. You must pay sales tax and establish a taxable capital gain or loss event at the time of the sale in order to take advantage of this convenience, though. Here’s what would happen if you used your cryptocurrency to purchase a candy bar:

• You send the cryptocurrency to the merchant, together with any applicable sales tax, through your wallet to theirs.
• You have produced a taxable event with a realized capital gain if the value of your cryptocurrency is greater now than it was when you first bought it. You suffer a capital loss if it’s less.
• Because it’s a taxable event, you need to record the amount you spent and its fair market value at the time of the transaction in order to report it at tax time.

So, you’re getting taxed twice when you use your cryptocurrency if its value has increased—sales tax and capital gains tax.

Buying cryptocurrency

Say you spent $3700 to purchase one bitcoin (BTC) in the beginning of 2019. 1 BTC was valued $38,500 at the end of February 2022. You could have bought a new car with that.

Both you and the seller in this transaction will be subject to tax consequences.

Because you cashed out an investment to buy anything, you must record the transaction as a capital gain, and the seller must report it as gross income based on the fair market value of Bitcoin at the time of the transaction. The profit is the difference between the cost of the bitcoin at the moment of purchase and its market value.

Cashing out cryptocurrency

You’ll need to know the cost basis of the digital coin you’re selling when exchanging it for fiat money. The entire amount you paid in fees and money is the cost basis for cryptocurrencies. The capital gains or losses are calculated when you sell your cryptocurrency for cash by deducting the cost basis from the cryptocurrency’s fair market value at the time of the transaction.

If you have a gain, the remaining sum is what is taxed.

Your cryptocurrency-related taxable gains (or losses) are recognized as capital gains or capital losses, just like with traditional assets.

Cryptocurrency mining

For individuals that mine cryptocurrencies, the rules are different. Miners of cryptocurrencies certify cryptocurrency transactions and add them to the blockchain. They receive cryptocurrency prizes as payment for their labor.

Unless the mining is a part of a business venture, their compensation is taxable as regular income. If the cryptocurrency was obtained through a business, the miners must report it as business income and can deduct the costs associated with their mining operations, such as the electricity used by their mining equipment.

Exchanging cryptocurrencies

Tax liability arises from cryptocurrency exchanges as well. For instance, if you use one cryptocurrency to buy another, you are essentially exchanging one for the other. Any gains or losses on the cryptocurrency you exchange must be reported.

By providing free exports of all trading data, several exchanges assist cryptocurrency traders in maintaining organization of all this information. This can be used to calculate the trader’s tax obligations by the trader or the trader’s tax advisor.

Cryptocurrency tax reporting

You’ll need to be slightly more prepared throughout the year than someone who doesn’t have investments if you want to report your taxes accurately. For instance, you must make sure that you keep a record of each cryptocurrency transaction, including the amount you spent and the currency’s market value at the moment you used it.

For tax year 2023 and 2024 filing purposes, cryptocurrency brokers—typically crypto exchanges—must send 1099 forms to their clients.

You can track and manage this data manually or with the aid of a blockchain solution platform. Platforms like CoinTracker, for instance, offer portfolio and transaction tracking so you can manage your digital assets and make sure you have access to your bitcoin tax data.

On IRS form 8949, sales and dispositions of capital assets, cryptocurrency capital gains and losses are recorded alongside regular capital gains and losses. 1 When attempting to file bitcoin taxes, especially for the first time, it is important to consult with a licensed accountant if you have any questions.

How much tax do I owe on crypto?

The amount you spend or swap, your income level and tax bracket, and how long you’ve owned the cryptocurrency you spent will all affect how much tax you owe on it. For instance, if you’ve had it for less than a year, you’ll owe taxes at your standard income tax rate, and if you’ve had it for more than a year, you’ll incur capital gains taxes.

How can I avoid paying taxes on crypto?

Other than not using your cryptocurrency, there are no legal ways to avoid paying taxes on it. If the value of your cryptocurrency increases, you will eventually have to pay taxes when you sell it, use it, convert it to money, exchange it, or trade it.

Do I pay taxes on crypto if I don’t sell?

Taxes are only due on cryptocurrency when a gain is realized, which can only happen when you sell, use, or trade it. The possession of a cryptocurrency is not taxable.

In India, cryptocurrencies are still a relatively new idea. The risk associated with using it is inherent because of its decentralized structure. The good news is that holding a cryptocurrency is not taxable. Given the foregoing, we believe that this blog will act as a reference point for understanding the volatile nature of cryptocurrency and its applicability in India.