Cryptocurrency takers in India are growing by the day. Crypto exchanges have seen a major increase in user accounts in the past few years. Several investors have got into cryptocurrency trading since Covid-19. Many of them have stuck around due to the large investment returns.
These virtual digital assets are getting adopted by investors seeing the significant returns they offer. Now the government wants a share of the pie. So far the crypto markets weren’t under government control and those who generated crypto returns were able to bag the profits.
Things changed when the government imposed a flat 30% tax on crypto gains. This is in addition to the 1% tax deducted at source if the transaction exceeds a certain threshold. From 1st April 2022, cryptocurrencies and NFTs have come under the tax scanner as virtual digital assets.
So let’s understand how crypto taxation in India actually works. But before we dive into the world of digital currencies, let’s understand what constitutes virtual digital assets.
Virtual digital assets
Virtual digital assets are a broad term used for digital currencies secured under the blockchain technology framework. These include –
- Cryptocurrencies like Bitcoin, Ethereum, and Solana
- NFTs like Bored Ape Yacht Club and Mutant Ape Yacht Club
Why are cryptocurrencies the most valuable virtual digital asset?
Cryptocurrencies like Bitcoin are some of the most valuable virtual digital assets as they are widely accepted as fiat currency. These digital currencies are an accepted mode of payment and all major platforms have a cryptocurrency option. You can easily buy or sell these digital assets just like a legal currency. This means, you pay taxes on these transactions, as you do on regular currencies.
What is a taxable crypto event?
The crypto activity is quite extensive and goes beyond general trading activity. There are mining, rewards, and airdrops that bring significant returns to investors. The profits generated by these activities are subject to taxation.
Here are the major taxable events when investors make capital gains from crypto transactions:
Cryptocurrency trading
Buying or selling of cryptocurrencies like Bitcoin, Tether, Dogecoin, USD Coin etc.
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Mining rewards
When you earn new coins through mining activities
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Staking rewards
These are rewards you collect from participating in proof-of-stake networks
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Airdrops and forks
Receiving free tokens via airdrops or as a result of blockchain forks
Which tax provision governs Cryptocurrencies?
The taxability of crypto assets was first introduced under the Finance Bill, 2022. The Bill introduced certain provisions in the Income Tax Act, 1961 regarding virtual digital assets such as cryptocurrencies. Here are the major sections in the Act that describe the taxability of crypto assets:
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Section 2 (47 A)
It defines virtual digital assets as “any information or code or number or token generated through cryptographic means”, “NFT”, or a digital asset notified by the Central Government.
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Section 115 BBH
This is the specific section of the Income Tax Act that lays down the 30% tax on the income from virtual digital assets. Section 115 BBH also stipulates that the loss made on VDA transactions can’t be adjusted on other income and can’t be carried forward to subsequent years.
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Section 194S
This section imposes a 1% TDS on VDA transfers. The TDS is applicable to all transactions.
How much do you pay on crypto assets?
The amount you pay as a tax on VDA transactions is divided into 3 categories. These are:
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Income from capital gains
The capital gains tax is applicable to the trading of cryptocurrencies.
Total tax applied – 30% CGT + 4% cess + 1% TDS
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Income from other sources
The income generated from the following activities is considered as income from other sources. These are:
- Mining
- Staking
- Airdrops
The tax rate on these transactions – 30% CGT+ 4% cess + 1% TDS
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If the transaction value exceeds a certain threshold
This provision is applicable when you receive VDAs as gifts and the value exceeds Rs. 50,000.
Tax rate – 30% CGT + 4% cess + 1% TDS
Example
Consider this. You bought a Bitcoin for Rs 10,000,000 and sold it for Rs 20,000,000
Your profit income becomes Rs 10,000,000. This income is taxable.
Let’s calculate the tax you’d have to pay on this income based on the tax rate mentioned above.
Rs 10,000,00 x 30% = Rs 300,000
Rs 10,000,00 x 4% = Rs 40,000
Rs 10,000,00 x 1% = Rs 10,000
Total tax payable = Rs 3,00,00 + Rs 40,000 + Rs 10,000 = Rs 3,50,000
Income after tax = Rs 10,000,00 – Rs 3,50,000 = Rs 6,50,000
How do you file crypto returns in India?
Here’s the step-by-step process of filing crypto returns in India:
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Log into the Income Tax Portal
Visit the Income Tax Department’s e-filing portal
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Select the applicable form
Now choose the form that applies to you.
- ITR-2 If you’re reporting capital gains
- ITR-3 if you’re reporting crypto business income
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Report your VDA
Fill in the details of your virtual digital assets in the relevant form. Provide details like the date of acquisition and transfer. Also, fill out the cost of acquisition.
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Submit the form
Submit your returns once you’ve filled in all the relevant details.
Importance of tax planning to save tax money
The tax on crypto assets can drain your savings if you don’t time your transactions or fail to invest in tax planning strategies. It’s important to explore the legal routes to save money on your virtual digital assets.
Here are some ways to do tax planning on your VDAs:
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Leverage accounting methods:
Use accounting techniques like FIFO (First-in, First-out) to know how much you’ll gain or lose in each VDA transaction. This will give you an estimate of the tax payable and help you manage costs.
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Schedule your transactions:
This is an important way to reduce your tax burden. Sell your assets at a time when you remain below the tax threshold. If that’s not possible then schedule it such that your taxable income remains low.
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Diversify your crypto portfolio:
Invest in various crypto assets and NFTs and stay invested as long as possible to maximise your returns. Portfolio diversification protects you from the volatility of crypto markets.
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Get professional tax and accounting services:
Consult a professional tax service provider if you think managing crypto tax planning is too complicated for you.
Conclusion
Cryptocurrency trading is at an all-time high in India. If you’re a crypto investor who has made significant investment returns on your virtual digital assets, you should prepare for tax planning. This is crucial as reporting requirements for virtual digital assets have become mandatory ever since these assets came under the income tax bracket.