Taxation of crypto in India: Everything you need to know

The current fiscal year, which ends in March 2023, is the first year in which Indian Crypto users will be taxed for their Crypto trades. In simple words, we can say that – any Indian resident who transacts Crypto, whether as a trader, miner, or yield farmer, is required (by the new Finance Bill of 2022) to declare their assets and pay taxes on the gains.

Let’s find out the intricacies of Crypto taxes in India in this article.

Crypto Basics

Crypto is an emerging asset class with its own benefits. Security and privacy top the list. To secure Crypto transactions, a technique known as Cryptography is employed. To put it simply, Cryptography is a method of converting understandable data into complicated codes that are difficult to crack. Furthermore, Crypto works on decentralized networks that work on blockchain technology.

Despite having the term “currency” in their name (generally), Cryptocurrencies are not a legal tender in India. However, they can be held as assets in the same way that stocks, gold, and bonds are held.

Crypto Tax in India: An Overview

To tax Crypto, a new section 115BBH was introduced in the 2022 budget. This section imposes a 30% tax (plus applicable surcharge and 4% cess) on profits made from Crypto trading (starting from April 1, 2022). This rate is the same as India’s highest income tax bracket (excluding surcharge and cess). Private investors, commercial traders, and anyone else who transfers Crypto assets in a given fiscal year are subject to this tax (subject to conditions).

Furthermore, the 30% tax rate will apply regardless of the nature of the income. So it makes no difference whether it is investment income or business income, and there is no distinction between short-term and long-term gains.

Here, the points to be remembered are:

• There is no expense deduction allowed.
• Only the acquisition cost can be deducted.
• Crypto losses cannot be subtracted from Crypto gains.
• There is no set-off for loss from any other source of income (business income or salary income or house property income etc.)
• There is no carry forward of Crypto losses to future years to set off against Crypto income.

Let’s take an example. If an investment of INR 2,00,000 was made in Crypto at the beginning of FY 2022, and by the end of FY 2022, the Crypto was sold for INR 2,50,000, a flat 30% Crypto tax is applicable on the gain (INR 50,000). As an investor, you will be liable to pay INR 15,000 (plus surcharge and cess) as the tax on Crypto income in that financial year.

It should be noted that any income derived from Crypto transactions is taxed only at the time of transfer; if a person continues to hold the asset, the unrealized gains are not taxable. Furthermore, except for the cost of acquisition, which is the purchase price, the Government will not allow other costs, such as platform fees, broker fees, and internet charges, to be deducted as expenses from profit. This is permitted in the trading of stocks and derivatives. Moreover, any other income cannot offset a loss from Crypto trading. Overall, the Government has neither legalized nor prohibited the use of Cryptocurrencies. However, it has taken steps to discourage short-term trading.

In addition to the above, 1% TDS (Tax Deductible at Source under section 194S of the Income Tax Act) on Crypto transactions was also introduced. This is applicable to all Crypto transactions undertaken on and after July 1, 2022.

Assume you want to buy INR 5,000 worth of Crypto from a seller. Due to the new TDS provisions, you will now pay (5,000-1% TDS) = INR 4,950 to secure the trade. The balance of INR 50 will have to be paid to the Government. Crypto exchanges can deduct this TDS on your behalf and deposit it with the Government (subject to conditions).

TDS will be charged on all Crypto transactions, including Crypto-to-Crypto transactions.

Crypto Tax in India: Recent Updates

• In June 2022, the CBDT amended the Income Tax rules in an official order to specify how firms will comply with the new rules and the reporting format for the same. The new rules require exchanges to deduct tax from the Crypto buyer under Section 194S of India’s Income Tax Act. These taxes must also be paid to the Government within 30 days of the end of the month in which they were deducted. According to the rules, a TDS certificate must be issued to the payee within 15 days of the due date for reporting the tax to the Government. Users require these certificates to claim a tax refund from the Government.

• On December 13, 2022, the Government announced that an amount of INR 60.46 crore had been collected in tax from entities for transactions in virtual digital assets (VDAs), including Cryptocurrencies, since the implementation of TDS provisions in July. In a written response to a question in the Rajya Sabha, Minister of State for Finance Pankaj Chaudhary stated that the CBDT conducts outreach/awareness programs for deductors/taxpayers and also takes appropriate action, such as search and seizure operations, surveys, and inquiries, as needed.

Conclusion

The Government’s tax measures on Cryptocurrency are comprehensive, and tax evasion is impossible. Crypto exchanges have been working towards a Government-compliant environment in which all trades and investments within the domain will be visible to the tax department transparently. Investors who want to invest or trade in virtual digital assets should become acquainted with the new tax regime and, ideally, consult a tax advisor before beginning their investment journey.

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