Taxation on Crypto Currency: Guide To Crypto Taxes
In recent years, the popularity of cryptocurrencies has significantly increased, with digital assets like Bitcoin, Ethereum, and others becoming mainstream investment options.
But do you know your crypto transactions might have tax implications? Yes, you heard that right! Read on to find out.
Latest Updates On Cryptotax
Newly introduced ITR forms for the financial year 2023-24 now include a dedicated section known as Schedule - Virtual Digital Assets (VDA). This reports gains derived from various virtual digital assets, such as cryptocurrencies and NFTs.
Indian investors actively trading cryptocurrencies and NFTs must declare their income from these assets.
The income must be reported as capital gains if the virtual assets are held as investments.
The income is categorized as business income for NFTs and cryptocurrencies held for trading purposes.
What Is Cryptocurrency?
Individuals often get confused about whether crypto is a ‘currency’ or an ‘asset’. It is a type of currency that can be used to buy things online, and the transactions are super secure because solid codes protect them.
Today, more than 17,000 different cryptocurrencies are there, and the number is continuously increasing. These operate differently from traditional money and don't rely on banks or big organizations; instead, it's decentralized.
Is Cryptocurrency Taxed In India?
In the Union Budget 2022, the cryptocurrencies were declared taxable in India. Also, all digital assets, including crypto such as Bitcoin, Ethereum, and Non-fungible tokens (NFTs), are termed as “Virtual Digital Assets”.
How Is Cryptocurrency Taxed In India?
Here’s how cryptocurrency is taxed in India.
Tax Rate On Trading Cryptocurrencies
Under section 115BBH of the IT Act, the profit made from trading cryptocurrencies is taxed at a rate of 30%, plus an additional 4% cess.
TDS On Crypto Transfers
From July 1, 2022, if you transfer crypto assets for an amount exceeding Rs. 50,000 (or Rs. 10,000 in specific cases, TDS (Tax Deducted at Source) will be deducted at a rate of 1% under section 194S.
Applicability to Investors and Businesses
The crypto tax will be applied to all investors, whether investing individually or involved in commercial transactions.
Uniform Tax Rates for Short-Term and Long-Term Gains
Cryptocurrencies have a uniform tax rate for both short-term and long-term gains. This rate stands at 30%, plus a 4% surcharge, and is applicable to all types of income.
TDS on Crypto Asset Sales
TDS is levied at a rate of 1% on the sale of crypto assets when the transaction amount exceeds Rs. 50,000 (or Rs. 10,000 in specific situations).
How Is Tax Calculated On Crypto?
Below is the simple formula to calculate the tax on your cryptocurrency profits.
Firstly, you must determine your cryptocurrency gains, which are the difference between the Sale and Purchase Prices (or Cost of Acquisition).
Gains from Crypto = Sale Price - Purchase Price
Once you've identified your gains, apply a 30% tax rate to calculate the amount of tax on your crypto profits.
Crypto Taxable Amount = 30% of Gains from Crypto
Which Crypto Transactions Are Accountable To Tax in India?
Below, crypto transactions are accountable to tax in India.
For purchasing goods and services, which includes everyday transactions on digital assets.
Interchanging one cryptocurrency for another. For instance, If you trade Bitcoin for Tether, the transaction may incur tax liabilities.
If you receive payment for services in the form of cryptocurrencies, the value of those earnings is taxable.
Receiving cryptocurrencies as a gift.
The rewards earned through cryptocurrency mining.
Trading cryptocurrencies with fiat currency, such as Indian Rupees (INR).
If you receive your salary in cryptocurrencies.
Earnings from staking, where you hold and lock up your crypto to support the operations of a blockchain network.
Receiving free tokens through airdrops.
How TDS Is Levied On Crypto Transactions
TDS, or Tax Deducted at Source, is like a built-in tax on crypto transactions in India. The idea is to tax crypto traders and investors right when they make a transaction by initially deducting the TDS at 1%.
If you're using an Indian exchange, TDS will be deducted automatically, but if you're trading on a foreign exchange, it's your responsibility to take out that 1% and report it in the income tax return (ITR).
Here’s how TDS transaction works in different scenarios.
P2P Transactions: In P2P transactions, where individuals trade directly with each other, the buyer will deduct TDS. Following this, depending on the nature of the transaction, they must file the appropriate form, either 26QE or 26Q.
Crypto-to-Crypto Transactions: On swapping one type of crypto for another, TDS at 1% will be liable to both the buyer and the seller.
Frequently Asked Questions (FAQs)
Is the income earned from crypto is taxable?
Yes, income earned from crypto is classified as virtual digital assets (VDAs) and liable to taxation in India. As per Section 115BBH, the profits are subject to a tax rate of 30%, along with an additional four percent cess.
How can I save taxes on crypto?
Some of the effective strategies for saving on crypto gains tax in India include:
Hold your cryptocurrency investments for an extended period, typically over 3 years.
Use tax-saving investment options provided under Section 80C of the Income Tax Act.
Consider diversifying your investment portfolio beyond cryptocurrencies.
Seek advice from a Karr tax professional to get personalized guidance according to your financial aspects.
However, avoiding your tax liabilities is inappropriate because they contribute to the nation’s wealth and infrastructure.
What if I don’t pay taxes on crypto?
Not paying taxes on cryptocurrency income or gains is against the law, which results in fines, penalties, or even imprisonment.
Is it possible to seek a refund on the TDS paid on crypto transactions?
Absolutely, yes! You can get a refund if you've paid 1% TDS on your cryptocurrency transactions and your total income tax for the year is less than the TDS amount deducted from crypto trading.
How can I calculate a 30% tax on crypto?
To calculate a 30% tax on cryptocurrency, you must determine the income generated from your crypto activities. This can be calculated by subtracting the cost price (what you paid) from the sale price (what you earned).
After getting the amount, apply the 30% tax rate to determine the amount you owe in taxes on your cryptocurrency gains.
