Crypto Beginner

Tax on crypto transactions: An explainer

Tax on Crypto Trading

Key Takeaways

  • Currently, crypto assets are unregulated in India.
  • Union Budget for 2023 applies a 30% tax on capital gains from crypto transactions and a 1% TDS on all crypto transactions.
  • Taxation does not legalize crypto in India. Rather, it is simply an attempt to regulate virtual digital assets.

Some saw the tax on Virtual Digital Assets (VDAs) announced in the 2022–23 Budget as the first step toward crypto regulation. And Budget 2023–24 continued with the same taxation scheme. Yet, as things stand today, crypto assets are still unregulated in India. Read on to understand the nuances of it all.

Crypto is an asset, not a currency

The term “cryptocurrency” is often used interchangeably with the term “crypto asset.” As a result, many end up confusing the two terms and thinking of crypto as a currency. But a close look at the characteristics of cryptos and currencies would help us see how very different they are.

An asset is an item that is widely regarded as having value. A person or company usually owns an asset. It can be used to meet debts, commitments, or legacies. In that sense, crypto is an asset. It offers investors the opportunity to diversify their portfolios. On the other hand, “currency” refers to legal tender issued and controlled by the government. It is generally accepted for the purchase of goods and services.

In India, crypto is classified as an asset. And the Advertising Standards Council of India has prohibited any reference to crypto as a “security” or a “currency.”

Tax on crypto in India: Budget 2023

Capital assets come under the purview of capital gains. And cryptos fall in the capital assets category because section 115BBH of the Income Tax Act, 1961 stipulates that all VDA purchases are subject to government taxation.

So, how much tax are you expected to pay on crypto?

1. 30% income tax: Crypto transactions resulting in capital gains attract a taxation rate of up to 30%. The consideration does not include the cost of acquisition of the underlying VDAs. Additionally, profits or gains from crypto transactions cannot offset losses incurred from other assets. Crypto traders and investors must declare such income sources when filing tax returns.

2. 1% TDS is applicable: Additionally, a 1% Tax Deducted at Source (TDS) applies to all crypto transactions, even if those trades result in a loss. However, the cumulative TDS can be adjusted against the total income tax payable at the end of the year.

The interpretation of TDS gives crypto buyers the authority to withhold 1% of the amount sellers are willing to accept. Such tax actions impact the crypto community and discourage investors from seeking alternative avenues to diversify their portfolios.

3. Crypto gifts: Receiving cryptos as gifts is also taxable under the VDAs provision mentioned in the budget.

That’s the larger picture. But the process of collecting tax on virtual digital assets is yet to pick up pace as the market is unregulated.

Tax on crypto as another source of income

Crypto transactions are seen as another source of income. So income tax includes profits made through the transfer of VDA, including NFTs. The relevant thus bill states that crypto traders will pay taxes if the trades are positive, and tax will be payable at the rate of 30%.

Any income from other sources shall be considered separate and cannot influence the trader’s tax obligations. In that sense, the tax laws will only focus on the gains, which cannot be offset against losses.

Disclosure of crypto assets in the schedule of assets and liabilities

There are a few things to know if you’re wondering whether to disclose your crypto assets. Income tax laws stipulate that income from investments is exempt from tax if your taxable income is below ₹50 lakhs. If your income surpasses that limit, it’s mandatory to disclose such assets.

Also, the law states that individuals are responsible for declaring their foreign assets—both profits and losses. However, there’s uncertainty about where digital assets need to be declared since cryptos can’t be classified as Indian or foreign assets. The rule that many follow is that if the exchange is based in India, then it should be declared in the schedule. The legal system may also have to rely on the treatment it gets from investors or traders. If traders use crypto as stock-in-trade for gains, income generated from exchange activities must appear in the Income Tax Return.

Likewise, investors using crypto for long-term or short-term capital gains are responsible for disclosing income from such holdings. The only exemption is the cost of acquisition of the VDAs.

Does taxation make cryptos legal in India?

Taxation does not legalize crypto in India. Rather, it is simply an attempt to regulate virtual digital assets. The bottom line is this: The overall government stance on cryptos is not clear, and only time can bring more clarity.

FAQs

What is the tax on crypto transactions in India?

The gains made from trading cryptocurrencies are taxed at a rate of 30%(plus 4% cess) according to Section 115BBH. Section 194S levies 1% Tax Deducted at Source (TDS) on the transfer of crypto assets from July 01, 2022, if the transactions exceed ₹50,000 (or even ₹10,000 in some cases) in the same financial year.

Is TDS on crypto refundable?

Indian investors who have already paid a 30% tax on their gains from crypto transactions are liable to pay TDS. These two tax liabilities need to be settled individually. However, if the tax owed is less than the tax deducted, investors can claim the difference between the two as a refund when filing the tax return.

How do I avoid crypto tax?

To avoid paying tax on crypto, individuals can employ various strategies such as tax-loss harvesting, relocating to tax-friendly regions, holding crypto assets long term, or donating to charity.

Do I pay tax on crypto received?

Receiving crypto assets as gifts that exceed INR 50K are eligible for a 30% crypto tax. As airdrops categorize under gifts, it is taxable under India’s 30% crypto tax if the amount exceeds INR 50K.

How is crypto tax calculated?

Any gains derived through the transfer of virtual assets will be subject to a 30% tax rate. No of the type of income, such as a company or investment income, or the length of the holding term, the 30% cryptocurrency tax rate will always apply.

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