2023 India Cryptocurrency Tax Guide: Detailed Explanation of Policies, Optimization, and Compliance Key Points

Author: Ektha Surana

Is Cryptocurrency "Currency" or "Asset" in India?

Cryptocurrencies and NFTs are classified as "Virtual Digital Assets (VDA)," with Section 2(47A) added to the Income Tax Act to define the term. The definition is quite detailed but primarily includes any information, code, digital, or token generated through cryptography (not Indian or foreign legal tender). In short, "Virtual Digital Assets" refer to all types of crypto assets, including NFTs, tokens, and cryptocurrencies, but exclude gift cards or vouchers.

Is Cryptocurrency Taxed in India?

Yes, profits from cryptocurrencies are taxable in India. The government's official stance on cryptocurrencies and other virtual digital assets was clarified in the 2022 budget.

How is Cryptocurrency Taxed in India?

In India, cryptocurrencies are classified as virtual digital assets and are subject to taxation.

• According to Section 115BBH, profits from cryptocurrency transactions are taxed at 30% (plus a 4% surcharge).
• Section 194S states that from July 1, 2022, if the transaction amount in the same financial year exceeds ₹50,000 (or ₹10,000 in certain cases), a 1% Tax Deducted at Source (TDS) will be deducted on the transfer of crypto assets.
• The crypto tax applies to all investors transferring digital assets in the year, whether private or commercial investors.
• The tax rate for short-term and long-term gains is the same and applies to all types of income earned by investors.

Therefore, regardless of whether the income is considered capital gains or business income, profits from trading, selling, or exchanging cryptocurrencies will be taxed at a rate of 30% (plus a 4% surcharge). Additionally, a 1% TDS will apply to the sale of crypto assets exceeding ₹50,000 (or ₹10,000 in certain cases).

Key Points on Cryptocurrency Taxation

• A 30% tax is levied on cryptocurrency income under Section 115BBH, applicable from April 1, 2022;
• A 1% TDS is applicable on the transfer of VDA under Section 194S, effective from July 1, 2022;
• No other expenses can be deducted except for the cost of acquisition;
• Cryptocurrency gains should be reported in the ITR under Schedule VDA.

Which Cryptocurrency Transactions Need to be Taxed in India?

If you engage in the following transactions, you will need to pay a 30% tax:

• Purchasing goods or services using cryptocurrency.
• Exchanging cryptocurrency for other cryptocurrencies.
• Trading cryptocurrency with fiat currency.
• Receiving cryptocurrency as payment for services.
• Receiving cryptocurrency as a gift.
• Cryptocurrency mining.
• Receiving cryptocurrency as salary.
• Staking cryptocurrency and earning staking rewards.
• Receiving airdrops.

How to Calculate Cryptocurrency Tax

Now that you know you must pay a 30% tax on cryptocurrency profits, let's see how to calculate the profit. Profit is the selling price minus the cost price.

Understanding TDS on Cryptocurrency Transactions

Tax Deducted at Source (TDS) is designed to tax cryptocurrency traders and investors by deducting a certain percentage at the source when they engage in transactions. The buyer, who owes money to the seller, must deduct the TDS amount and remit it to the central government, paying the remaining amount to the seller. In India, the TDS rate for cryptocurrencies is set at 1%. From July 1, 2022, the buyer is responsible for deducting TDS at a rate of 1% when paying the seller for cryptocurrency/NFT transfers. If the transaction occurs on an exchange, the exchange may deduct TDS and pay the balance to the seller. Indian exchanges automatically deduct TDS, while individuals trading on foreign exchanges must manually deduct TDS and submit TDS returns.

• P2P Transactions: If it is a P2P transaction, the buyer will be responsible for deducting TDS and submitting Form 26QE or 26Q (as applicable). For example, purchasing cryptocurrency using rupees through a P2P platform or international exchange.
• Cryptocurrency Trading: TDS applies at a 1% rate to both the buyer and seller. For example, purchasing cryptocurrency with stablecoins.

Airdrop Tax

An airdrop refers to the process of distributing cryptocurrency tokens or coins directly to specific wallet addresses, usually for free. The purpose of an airdrop is to raise awareness of the token and increase liquidity in the early stages of the new currency. Airdrops are taxed at 30%. So, what is the taxable amount for airdrops?

• Receiving Cryptocurrency: Airdrops will be taxed at the value determined by Rule 11UA, which is the market value of the tokens on the day they are received from the exchange or decentralized exchange. The tax will be levied at 30% of that value.
• Selling, Exchanging, or Spending Them Later: If you later sell, exchange, or spend these tokens, a 30% tax will be levied on the profits.

For example: 1) Suppose Mr. Bob received 20,000 ABC tokens as an airdrop on April 1, 2022, but these tokens are not traded on any exchange or DEX. In this case, it will not be taxed. 2) Now suppose Mr. Bob also received 20,000 ABC tokens as an airdrop on April 1, 2022, and the ABC token is traded on an exchange or DEX (for exchange, purchase, or sale). On April 1, 2022, the price of ABC tokens on the exchange is ₹10.

• In this case, a tax of 30% will be levied on ₹200,000 (20,000 * ₹10).
• Now, if Mr. Bob sells these tokens for ₹500,000, ₹200,000 will be considered the cost, and the remaining ₹300,000 will be taxed at 30%.

Cryptocurrency Mining Taxation

Mining refers to the process of verifying and recording transactions on a blockchain network using powerful computers or specialized mining hardware. In the blockchain network, transactions are verified by a group of nodes or computers called "miners," who compete to solve complex mathematical problems. The first miner to solve the problem receives a certain amount of cryptocurrency as a reward, which varies by network. The income received from mining will be uniformly taxed at 30%. When calculating profits from sales, the cost of cryptocurrency mining will be considered "0." Costs such as electricity, infrastructure fees, etc., should not be included in the cost of acquisition. So, what is the taxable amount for cryptocurrency mining?

• Receiving Cryptocurrency: The crypto assets received during mining will be taxed at the value determined by Rule 11UA, which is the market value of the tokens on the day they are received from the exchange or decentralized exchange. The tax rate will be 30% of that value.
• Selling, Exchanging, or Using Later: If you later sell, exchange, or use these assets, a 30% tax will be levied on the profits.

Cryptocurrency Staking/Minting Tax

In the cryptocurrency space, minting refers to the process of generating new blocks in the blockchain using a proof-of-stake algorithm in exchange for newly generated cryptocurrency and rewards in the form of commissions. If you stake cryptocurrency, you may need to pay taxes on the income earned. The amount earned from staking depends on the annual interest rate provided by the validator. For example, if you stake 100 coins at a 10% annual interest rate, you will earn 10% interest annually. Your income from staking will be taxed at 30%. Additionally, when you sell the crypto assets, you will need to pay a 30% capital gains tax. Generally, transferring your tokens to a staking pool or wallet does not usually incur taxes. Furthermore, transferring assets between wallets is generally considered tax-free.

Cryptocurrency Tax on Gifts

In the 2022 budget, virtual digital assets were included in the category of movable property. Therefore, if the total value of gifts exceeds ₹50,000, the received crypto gifts will be taxed as "income from other sources" at the regular fixed tax rate. Gifts of cryptocurrency from relatives will be tax-exempt. However, if the value of cryptocurrency gifts from non-relatives exceeds ₹50,000, it will be taxable. Gifts received on special occasions, through inheritance or will, marriage, or due to death may also be exempt from tax.

Losses from Cryptocurrency Transactions

According to Section 115BBH of the tax law, any losses incurred from cryptocurrencies cannot be offset against any income (including cryptocurrency gains). Therefore, cryptocurrency investors cannot offset losses from last year's crypto assets when filing their ITR (Income Tax Return) this year. Additionally, Indian cryptocurrency investors cannot report expenses related to their cryptocurrency activities, except for the cost of acquisition or purchase cost. For example, Mr. X purchased Bitcoin worth ₹60,000 and later sold it for ₹80,000. He also purchased Ethereum worth ₹40,000 and sold it for ₹30,000. The exchange charged a transaction fee of ₹1,000. The tax on these two transactions should be calculated as follows:

Here, the loss of ₹10,000 cannot be offset against the gain of ₹20,000. The entire income of ₹20,000 will be taxed at 30%. Additionally, the transaction fee of ₹1,000 is not deductible.

Disclosure of Cryptocurrency Assets in the Balance Sheet

The Ministry of Corporate Affairs (MCA) has mandated the disclosure of profits and losses from cryptocurrencies. Additionally, the value of cryptocurrencies as of the balance sheet date should also be reported. Therefore, from April 1, 2021, Schedule III of the Companies Act has also been amended. This provision can be seen as the government's first step toward regulating cryptocurrencies. Please note that this directive only applies to companies, and individual taxpayers are not required to comply with such regulations. However, reporting and paying taxes on cryptocurrency gains is mandatory for everyone.

Timeline of Cryptocurrency Tax Regulations in India

Frequently Asked Questions about Cryptocurrency Tax in India

A How much tax does India levy on cryptocurrencies?

• According to Section 115BBH, profits from cryptocurrencies are subject to a 30% tax (along with applicable surcharges and a 4% tax). B How to calculate cryptocurrency tax? - As mentioned above, the taxation of cryptocurrency profits depends on the type of transaction. C How to calculate the 30% cryptocurrency tax? - Income from cryptocurrency will be taxed at 30%. Income = Selling Price - Cost Price D How to report cryptocurrency on the tax return? - For the financial years 2022-23 and 2023-24, you need to use ITR-2 form (if reporting as capital gains) or ITR-3 form (if reporting as business income) to declare cryptocurrency tax. The new ITR forms include a specific section "Schedule VDA" for reporting cryptocurrency gains or income. According to standard income tax rules, profits from cryptocurrency transactions will be taxed as follows: (i) business income or (ii) capital gains. The classification depends on the investor's intent and the nature of these transactions.

• Business Income: If transactions are frequent and of significant volume, profits from cryptocurrencies may be classified as "business income." In this case, ITR-3 can be used to report crypto gains.

• Capital Gains: On the other hand, if the primary reason for holding cryptocurrencies is to benefit from long-term value appreciation, the gains will be classified as "capital gains." In this case, ITR-2 can be used to report crypto gains.