Since its inception in 2009, cryptocurrency has gradually found its way into the mainstream, attracting a broad user base globally. In India, however, the regulatory framework has been slow to evolve.

It wasn’t until 2022 that the Indian Government formulated and introduced specific tax guidelines for cryptocurrencies, marking a significant step in recognizing and integrating these digital assets into the formal economic system. This article will delve into the details of crypto taxation in India, offering a clear understanding of its workings and implications.

Introduction to Crypto Tax in India

Despite cryptocurrencies not being legally recognized as currency in India, the government laid out its tax policies in the Union Budget 2022. Addressing cryptocurrencies and other digital assets under the collective term “Virtual Digital Assets,” the government established a tax framework to regulate these burgeoning financial instruments.

How Crypto Tax Works in India

The Finance Bill under Section 115BBH stipulates comprehensive guidelines on cryptocurrency taxation:

• Tax on Profits: Investors are required to pay a 30% tax on profits earned from cryptocurrency transactions, along with a 4% cess.
• 1% TDS: A 1% Tax Deducted at Source (TDS) is applicable on all crypto transfers exceeding INR 10,000, effective from July 1, 2022.
• Nature of Taxation: The tax applies to both retail and commercial investors and encompasses all forms of earnings from digital assets, irrespective of the investment duration.

Gifts in digital assets are also taxable, with the recipient bearing the tax liability.

Additional Tax Conditions in India

The 2022 Finance Bill elaborates on several scenarios:

• Universal Tax Rate: All earnings from virtual digital assets are subject to a flat 30% tax.
• TDS Applicability: A 1% TDS is mandated on all transactions involving the exchange and transfer of digital assets, except when transferring between wallets owned by the same person.
• Deductible Costs: Only the acquisition cost of cryptocurrencies is deductible when calculating taxable income.
• Non-offsettable Losses: Losses from one cryptocurrency cannot be offset against gains from another.
• Reporting Requirements: All gains must be declared under the “Schedule VDA” in the Income Tax Returns (ITR).
• Mining Costs: Costs incurred from crypto mining cannot be deducted as acquisition costs.

Transactions Subject to Crypto Tax

The tax applies to a wide range of transactions including:

• Exchanges: Both crypto-to-fiat and crypto-to-crypto transactions.
• Conversions: Changing one digital asset type into another.
• Payments: Using crypto for goods and services, or receiving it as payment.
• Incomes: Earnings from trading, staking, airdrops, and mining.

Updates from Union Budget 2023

Further clarifications were provided in the Union Budget 2023 regarding Section 115BBH, particularly about the cost of acquisition and loss reporting. Noteworthy updates included:

• Capital Gains Declaration: Income from digital assets held as investments must be declared as capital gains.
• Business Income: If held for trading, profits should be reported as business income.
• New ITR Forms: Introduction of a dedicated section for Virtual Digital Assets in ITR forms to streamline reporting.

Conclusion

Crypto taxation in India represents a significant move towards the formal recognition and integration of digital assets into the financial landscape of the country. While the framework provides a basis for taxation, continuous updates and refinements are expected as the market evolves and the government gains a deeper understanding of the implications of these digital assets.

Investors and users of cryptocurrencies should stay informed and compliant with the tax regulations to avoid any legal repercussions and to contribute to the structured growth of digital assets within India’s economy.