Table of Contents
Cryptocurrencies and Non-Fungible Tokens (NFTs) have grown significantly in popularity, and with this growth, the Indian government has introduced clear guidelines on how these digital assets are taxed. This article will break down the current tax regulations on crypto assets in India, making it easy for you to understand your tax obligations if you’re trading or investing in these digital assets.
What Are Crypto Assets?
In 2022, the Indian government officially categorized cryptocurrencies and NFTs under a new term—Virtual Digital Assets (VDAs). These include any information, code, number, or token generated cryptographically. Essentially, VDAs cover all types of crypto assets, including cryptocurrencies like Bitcoin and Ethereum, as well as NFTs and other digital tokens. However, VDAs do not include traditional gift cards or vouchers.
How Are Crypto Assets Taxed?
1. Flat 30% Tax Rate on Gains
If you make a profit from trading or selling crypto assets, the government will tax these gains at a flat rate of 30%. This tax rate is the same whether the assets were held for a short or long period, meaning that there is no difference between short-term and long-term gains in this case.
2. Additional 4% Cess
In addition to the 30% tax, there is a 4% cess, which brings the total effective tax rate to slightly above 30%. This cess is applied uniformly across all income brackets.
3. 1% TDS on Transactions
Since July 1, 2022, a 1% Tax Deducted at Source (TDS) has been applied to all transactions involving crypto assets if the total transactions exceed ₹50,000 (or ₹10,000 in some cases) in a financial year. This TDS is applicable to both buyers and sellers of digital assets.
4. No Deductions Allowed
When calculating your taxable income from crypto assets, you cannot claim any deductions except for the cost of acquisition. This means that expenses such as transaction fees or other associated costs cannot be deducted from your taxable income.
5. No Set-Off for Losses
If you incur a loss from trading one crypto asset, you cannot use this loss to offset gains from another crypto asset or any other form of income. Each crypto asset is treated individually for tax purposes.
6. Tax on Gifts
If you receive a crypto asset as a gift, you are liable to pay tax on its value. The tax will be calculated based on the asset’s market value at the time of transfer.
What crypto transactions are taxed in India?
In India, if you engage in any of the following cryptocurrency transactions, you will be subject to a 30% tax on the gains made from these activities:
- Spending Cryptocurrencies to Purchase Goods or Services
- When you use cryptocurrencies to buy goods or pay for services, any profit or gain resulting from the increase in the value of the cryptocurrency (from the time you acquired it to the time you spent it) is taxable.
- Exchanging Cryptocurrencies for Other Cryptocurrencies
- If you trade one cryptocurrency for another, the transaction is considered a taxable event. The gain or loss is calculated based on the difference in the value of the cryptocurrency at the time of acquisition and at the time of the exchange.
- Trading Cryptocurrency Using Fiat Currency
- When you buy or sell cryptocurrencies using traditional currency like the Indian Rupee (INR), any profit earned from this trade is subject to a 30% tax. This applies whether you are selling your crypto for fiat or buying crypto with fiat for future gains.
- Receiving Cryptocurrency as Payment for a Service
- If you are paid in cryptocurrency for services rendered, the value of the cryptocurrency received is considered income and is taxable at the rate of 30%. The value is assessed at the market rate on the day of the transaction.
- Receiving Cryptocurrency as a Gift
- Cryptocurrencies received as gifts are also taxable. The tax is levied on the recipient based on the market value of the cryptocurrency at the time of receiving the gift.
- Mining Cryptocurrency
- If you mine cryptocurrency, any rewards earned from mining are considered taxable income. The tax is applied to the fair market value of the cryptocurrency on the day it is mined.
- Drawing a Salary in Cryptocurrency
- If your salary or part of your salary is paid in cryptocurrency, the value of the cryptocurrency received is treated as taxable income. The tax is based on the market value of the cryptocurrency at the time of payment.
- Staking Crypto and Earning Stake Benefits
- Earnings from staking crypto, including rewards or interest, are considered income and are subject to tax. The tax is levied on the value of the stake benefits at the time they are received.
- Receiving Airdrops
- Airdrops, which are free distributions of cryptocurrency tokens, are taxable as well. The tax is calculated based on the market value of the tokens at the time they are received.
TDS on Crypto Transactions in India
Tax Deducted at Source (TDS) is a mechanism introduced by the Indian government to collect tax at the source of income. In the context of cryptocurrency transactions, TDS is applied to ensure that tax is collected from crypto traders and investors at the time of the transaction itself.
How TDS Works on Crypto Transactions
When a buyer purchases cryptocurrency from a seller, the buyer is responsible for deducting a certain percentage of the transaction value as TDS and remitting it to the central government. In India, the TDS rate for crypto transactions is set at 1%. This requirement has been in effect since July 01, 2022.
Here’s how it works:
- The buyer must deduct 1% TDS from the payment amount before transferring the balance to the seller.
- The deducted TDS is then forwarded to the government, and the seller receives the remaining amount.
Role of Crypto Exchanges
For transactions carried out on cryptocurrency exchanges, the process can be simplified:
- Indian Exchanges: Most Indian crypto exchanges automatically deduct the 1% TDS at the time of the transaction. The seller receives the balance after TDS has been deducted.
- Foreign Exchanges: If you are trading on a foreign exchange, you will need to manually deduct the TDS and file your TDS returns. This includes making the payment to the government and ensuring that the required forms are submitted.
Special Cases in TDS Deduction
- P2P Transactions:
- In Peer-to-Peer (P2P) transactions, where buyers and sellers trade directly without an intermediary like an exchange, the buyer is responsible for deducting the TDS.
- After deducting TDS, the buyer must file Form 26QE or 26Q (depending on the nature of the transaction) to report the deducted tax to the government.
- Example: If you buy cryptocurrency using INR on a P2P platform or an international exchange, you must handle the TDS deduction and filing.
- Crypto-to-Crypto Transactions:
- TDS applies to both the buyer and the seller in crypto-to-crypto transactions. Each party is required to deduct 1% TDS on their side of the transaction.
- Example: If you buy cryptocurrency using stablecoins, both you (as the buyer) and the seller must deduct and remit 1% TDS.
- Non-Applicability of Section 194S TDS on VDAs:
- TDS under Section 194S is applicable only when purchasing Virtual Digital Assets (VDAs) from an Indian tax resident.
- If you are trading on an international exchange or a Decentralized Exchange (DEX) where the other party is a non-resident or a non-resident entity, Section 194S may not apply. In such cases, you may not be required to deduct TDS under this section.
Reporting Crypto Income
In 2023, the Income Tax Return (ITR) forms for the financial year 2022-23 introduced a new section dedicated to VDAs. This section, called Schedule – Virtual Digital Assets (VDA), allows taxpayers to report their income from crypto assets and NFTs. If you hold these assets as an investment, any gains will be classified as capital gains. The gains will be considered business income if you hold them for trading purposes.
Latest Updates in 2024
For the financial year 2023-24, no changes were made to the crypto tax regulations in the Interim Budget 2024. The existing rules continue to apply, ensuring that investors and traders are well aware of their tax obligations.
Conclusion
Crypto assets in India are subject to a stringent tax regime. With a 30% flat tax rate on gains, an additional 4% cess, and a 1% TDS on transactions, it’s crucial for investors and traders to carefully track their crypto activities and ensure compliance with tax laws. Whether you’re holding crypto as an investment or trading it regularly, you must declare your gains in your Income Tax Return to avoid legal complications.
References
- Government of India, “Union Budget 2022.”
- Income Tax Department, “Virtual Digital Assets (VDA) Taxation.”
- “Crypto Taxation Updates 2023,” Financial Express, 2023.
- Understanding the Differences: Psychiatrist vs. Psychologist - November 12, 2024
- What’s the Purpose of Living? - November 5, 2024
- Mutual funds returns calculator - October 20, 2024
