2023 India Cryptocurrency Tax Strategy: A Detailed Explanation of Policy, Optimization and Compliance Points

**Compile | Author |**Ektha Surana

Date: June 8, 2023

Source:

India Cryptocurrency Profile

Are cryptocurrencies a “currency” or an “asset” in India

Cryptocurrencies and NFTs are classified as “virtual digital assets (VDAs)” and section 2(47A) has been added to the Income Tax Act to define the term. The definition is very detailed but mainly includes any information, code, number, or token (not Indian or foreign fiat currency) generated by cryptographic means. In short, “virtual digital assets” refer to all types of crypto assets, including NFTs, tokens, and cryptocurrencies, but excluding gift cards or vouchers.

Is there a tax on cryptocurrencies in India?**

Yes, cryptocurrency earnings are taxable in India. The government’s official position on cryptocurrencies and other virtual digital assets was made clear in the 2022 budget.

How is cryptocurrency taxed in India?

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

• According to Article 115BBH, gains from cryptocurrency transactions are taxed at 30% (plus 4% tax).
• Section 194S provides for a tax deduction at source (TDS) at the rate of 1% on the transfer of crypto assets from 1 July 2022 if the transaction amount exceeds Rs 50,000 (and in some cases Rs 10,000) in the same financial year.
• Crypto tax applies to all investors, whether private or commercial, who transfer digital assets during the year.
• Short-term and long-term gains are taxed at the same rate and apply to all types of income earned by investors.

Therefore, gains from trading, selling, or exchanging cryptocurrencies will be taxed at a rate of 30% (plus a 4% surcharge), regardless of whether the income is considered capital gains or business income. In addition to this tax, a 1% TDS will also apply to the sale of crypto assets above Rs 50,000 (or in some cases Rs 10,000).

Cryptocurrency Tax Essentials

• 30% tax on cryptocurrency income in accordance with Article 115BBH applicable from April 1, 2022;
• In accordance with Article 194S applicable from 1 July 2022, the transfer of VDAs is subject to a TDS of 1%;
• No deductions can be made for expenses other than the cost of acquisition;
• Cryptocurrency gains should be reported in accordance with the ITR’s Schedule VDA.

Which cryptocurrency transactions are taxable in India?

You will be subject to a 30% tax if you engage in the following transactions:

• Use cryptocurrency to purchase goods or services.
• Exchange crypto for other cryptocurrencies
• Trade cryptocurrencies with fiat currencies
• Receive cryptocurrency as remuneration for services
• Receive cryptocurrency as a gift
• Cryptocurrency mining
• Get cryptocurrency payroll earnings
• Stake crypto and earn staking rewards
• Receive airdrops

How to Calculate Cryptocurrency Tax

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

Understanding Source Deduction Tax for Cryptocurrency Transactions

Tax deducted at source (TDS) is designed to tax cryptocurrency traders and investors when they make a transaction by deducting a percentage at source. The buyer who owes the seller the amount must subtract the TDS amount and hand it over to the central government to pay the balance to the seller. In India, the TDS tax rate for cryptocurrencies is set at 1%. As of July 1, 2022, the buyer will be responsible for deducting TDS at a rate of 1% when paying the cryptocurrency/NFT transfer fee to the seller. If the transaction takes place on an exchange, then the exchange may deduct the TDS and pay the balance to the seller. TDS is automatically deducted by Indian exchanges, while individuals trading forex must manually deduct TDS and file TDS returns.

• P2P Transactions: In the case of P2P transactions, the buyer will be responsible for deducting TDS and submitting Form 26QE or 26Q (whichever is applicable). For example, using rupees to buy cryptocurrencies through P2P platforms or international exchanges.
• Cryptocurrency transactions: TDS applies a 1% tax rate to both buyers and sellers. For example, buying cryptocurrencies with stablecoins.

Airdrop Tax

An airdrop is the process of distributing cryptocurrency tokens or coins directly to a specific wallet address, usually for free. The purpose of the airdrop is to raise awareness of the token and increase liquidity in the early stages of a new currency. Airdrops are taxed at 30%.

So how much is the airdrop taxed?

• Receiving Cryptocurrency: The airdrop will be taxed according to the value determined by the 11UA rule, i.e. according to the market value of the token on the day it is received by the exchange or decentralized exchange. The tax will be levied at 30% of that value.
• Sell, exchange, or spend them later: If you sell, exchange, or spend these tokens later, a 30% tax will be levied on the proceeds earned.

For example:

1. Let’s say Mr. Bob receives an airdrop of 20,000 BCH tokens on April 1, 2022, but these tokens are not traded on exchanges or DEXs. Then it won’t be taxed.

2. Now let’s say that Mr. Bob also received an airdrop of 20,000 BCH tokens on April 1, 2022, and BCH tokens are traded (exchanged, bought, or sold) on an exchange or DEX. On April 1, 2022, the price of the BCH token on the exchange was Rs 10.

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

Cryptocurrency Mining Tax

Mining refers to the process of verifying and recording transactions on a blockchain network by using powerful computers or specialized mining hardware.

In a blockchain network, transactions are verified by a group of nodes or computers called “miners” who compete to solve complex mathematical puzzles. The first miner to solve the puzzle will be rewarded with a certain amount of cryptocurrency, and the amount of the reward varies from network to network.

Mining revenues received will be taxed at a flat rate of 30%. The cost of cryptocurrency mining will be considered “0” when calculating the proceeds at the time of sale. Expenses such as electricity and infrastructure costs must not be included in the acquisition cost.

So how much is the tax on cryptocurrency mining?

• Receipt of cryptocurrency: Crypto assets received at the time of mining will be taxed at the value determined by 11UA, i.e. according to the market value of the token on the date it is received by the exchange or decentralized exchange. The tax rate will be levied at 30% of that value.
• Sale, exchange, or later use: If these assets are later sold, exchanged, or used, a 30% tax will be levied on the proceeds earned.

Cryptocurrency Staking/Minting Tax

In the world of cryptocurrency, minting refers to the process of generating new blocks in a blockchain using a proof-of-stake algorithm in exchange for a reward in the form of newly generated cryptocurrency and commissions.

If you stake cryptocurrency, you may need to pay taxes on your income. The amount earned from staking depends on the APR offered by the validator. For example, if you stake 100 coins at an annual interest rate of 10%, you will receive 10% interest per year.

Your earnings from staking will be taxed at 30%. In addition, when you sell crypto assets, you will be subject to a 30% capital gains tax.

In general, transferring your tokens to a staking pool or wallet usually doesn’t generate taxes. Additionally, transferring assets between wallets is generally considered tax-free.

Crypto Tax on Gifts

In the 2022 budget, virtual digital assets are included in the scope of movable assets. Therefore, if the total value of the gift exceeds Rs 50,000, the crypto gift received will be taxed at the regular fixed rate as “income from other sources”.

Cryptocurrencies given as gifts by relatives will be tax-deductible. However, if a cryptocurrency gift given by a non-relative is worth more than Rs 50,000, it is taxable. Gifts received on special occasions, through inheritance or wills, marriage, or contemplation of death are also tax-deductible.

Losses due to cryptocurrency trading

According to the provisions of Tax Code 115BBH, any losses caused by cryptocurrencies cannot be offset against any income, including cryptocurrency gains. As a result, crypto investors will not be able to offset the losses in crypto assets last year when they file their ITRs (Declaration Forms) this year.

In addition, Indian cryptocurrency investors are not allowed to declare expenses related to their cryptocurrency activities other than the cost of acquisition or the cost of purchase.

For example, Mr. X bought a BTC worth Rs 60,000 and later sold it for Rs 80,000. He also bought a ETH shop worth Rs 40,000 and sold it for Rs 30,000. The exchange charges a trading fee of Rs 1000. The tax on both transactions shall be calculated as follows:

Here, a loss of Rs 10,000 is not allowed to be offset with a gain of Rs 20,000. The tax rate is 30 per cent on all Rs 20,000 income. Also, the transaction fee of Rs 1000 is not allowed to be deducted.

Disclosure of Crypto Assets on Balance Sheet

The Department of Corporate Affairs (MCA) has made it mandatory to disclose profits and losses on cryptocurrencies. In addition, the value of the cryptocurrency at the balance sheet date should also be reported. As a result, from 1 April 2021, Schedule III of the Companies Act has also been changed. This regulation can be seen as the first step in the government’s regulation of cryptocurrencies.

Please note that this EO only applies to corporations, and individual taxpayers are not required to comply with such provisions. However, reporting and paying taxes on cryptocurrency earnings is a must for all.

Schedule of Cryptocurrency Tax Regulations in India

India Cryptocurrency Taxation FAQs

A How much tax is levied on cryptocurrencies in India?

• Cryptocurrency gains are subject to a 30% tax (plus an applicable surcharge and a 4% tax) under Section 115BBH.

B How is cryptocurrency tax calculated?

• As mentioned above, the taxation of cryptocurrency gains depends on the type of transaction.

C How do you calculate 30% cryptocurrency tax?

• Your income from cryptocurrency will be subject to a 30% crypto tax. Revenue = Sales Price - Cost Price

How do I report cryptocurrency on my tax return?

• For FY 2022-23 and FY 2023-24, you will need to file cryptocurrency taxes using Form ITR-2 (if reported as capital gains) or Form ITR-3 (if reported as Business Income). The new ITR form includes a specific section, “Schedule VDA”, which is used to report cryptocurrency earnings or income. Under standard income tax rules, gains from cryptocurrency transactions will be taxed as follows: (i) business income or (ii) capital gains. The classification depends on the intent of the investor and the nature of these transactions.

• Business Income: If transactions are frequent and the volume is high, earnings from cryptocurrencies may be classified as “business income”. In this case, ITR-3 can be used to report crypto earnings.
• Capital gains: On the other hand, if the main reason for owning a cryptocurrency is to benefit from long-term value appreciation, then the gain will be classified as a “capital gain”. In this case, ITR-2 can be used to report crypto earnings.