Crypto Beginner

Tax on crypto transactions: An explainer

Tax on Crypto Trading

Key Takeaways

  • Currently, crypto assets are unregulated in India.
  • Union Budget for 2022–23 introduced a 30% tax on capital gains from crypto transactions and a 1% TDS on all crypto transactions even if they result in a loss.
  • Taxation does not legalize crypto in India. Rather, it is simply an attempt to regulate virtual digital assets.

The new tax regime on Virtual Digital Assets (VDAs) announced in the Union Budget 2022–23 is being viewed by some as the first step toward regulating cryptos. But as things stand, crypto assets are unregulated in India. To understand what that means and to learn all about the nuances of tax on crypto in India, read on.

Cryptos are an asset, not currency

The term “cryptocurrency” is often used interchangeably with the term “crypto asset,” and that is the cause many people end up confusing the two. A close look at the characteristics of cryptos and currencies, though, would help us differentiate between them.

An asset is an item owned by a person or company that is widely regarded as having value. 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 the legal tender issued and controlled by the government. It is generally accepted for the purchase of goods and services.

Tax on Crypto in India – Budget 2022

While presenting the Union Budget 2022–23, Finance Minister Nirmala Sitharaman announced that gains arising from crypto transactions would be taxed this financial year. A broader view of the tax regime in India shows that capital assets come under the purview of capital gains. Cryptos fall in the capital assets category simply because section 115BBH provides that all virtual digital purchases are subject to taxation imposed by the government.

Tax on Bitcoin in India is the same as Tax on Crypto in India!

Tax on Crypto in India effective Date: 1 April 2022

So, how much tax would you pay on crypto?

1. 30% income tax: Crypto transactions resulting in capital gains would 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: In addition to the 30% tax, a 1% Tax Deducted at Source (TDS) will apply to all crypto transactions even if they result in a loss. However, the cumulative TDS can be adjusted against the total income tax payable at the end of the year. The TDS rule kicked in on 1 July 2022.

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 virtual digital assets 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 cryptocurrency in India as other sources of income

Tax on crypto as other sources of income follows the calculation of income tax from the transfer of VDA, including NFTs.

The underlying taxation 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 such events, the tax regime recognizes the transfer of cryptos as other sources of income, and the tax laws will only focus on the gains, not losses.

Disclosure of crypto assets in the schedule of assets and liabilities

Income tax laws clearly state that individuals are responsible for declaring their foreign assets—both profits and losses. It also provides that income from the investments is exempted from tax if the income is below ₹50 lakh. If it surpasses that limit, it’s mandatory to disclose such assets.

There’s uncertainty about where the digital assets fall in the income tax returns schedule since cryptos can’t be classified as an Indian or foreign asset. Crypto is not recognized as a legal tender, which means that the underlying technological innovation is branded as an asset or commodity.

There are also no guidelines for the disclosure of crypto holdings, and the legal system may 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 received from such holdings. The only exemption applicable 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.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user’s own risk.

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