Cryptocurrencies are emerging as prominent financial innovation, offering decentralised and borderless transactions. In India virtual digital assets (VDAs) such as cryptocurrencies, NFTs, etc. are now subject to taxation, whose capital gains are taxable at a flat 30%. Also, TDS is deducted at 1% of sale consideration. In this article, we will learn in detail the taxation implications on virtual digital assets.

What are Crypto Currencies?

In layman's terms, cryptocurrencies are digital currencies designed to buy goods and services, similar to other currencies. However, they have largely been controversial due to their de-centralised nature, meaning their operation without any intermediary like banks, financial institutions, or central authorities.

Today, more than 1,500 virtual currencies, such as Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic, etc., are traded in the digital currency world. The investment and trading volume of cryptocurrencies has increased multifold.  

Is Crypto ‘Currency’ Or an ‘Asset'?

• Crypto and NFTs were categorised as "Virtual Digital Assets", and Section 2(47A) was added to the Income Tax Act to define this term. 
• The definition is quite detailed but mainly includes any information, code, number or token (not Indian or foreign fiat currency) generated through cryptographic means. 

In simple words, VDAs mean all types of crypto assets, including NFTs, tokens, and cryptocurrencies, but they will not include gift cards or vouchers.

Is Crypto Taxed in India?

Yes, gains from cryptocurrency are taxable in India. The government's official stance on cryptocurrencies and other VDAs was clarified in the 2022 Budget. 

How is Cryptocurrency Taxed in India?

• Income from the transfer of virtual digital assets such as crypto and NFTs will be taxed at 30% (plus 4% cess).
• Section 194S levies 1% Tax Deducted at Source (TDS) on sale consideration if the transactions exceed ₹50,000 (or even ₹10,000 in some cases) in the same financial year. 
• No deduction, except the cost of acquisition, will be allowed while reporting income from the transfer of digital assets.
• Gifting of digital assets will attract tax in the hands of the receiver.
• The crypto tax applies to all investors, whether private or commercial, who transfer digital assets during the year.
• The tax rate is the same for Short-Term and Long-Term gains.
• Loss from digital assets cannot be set-off against any other income.(not even income from other digital currency)
• Crypto Gains should be reported under Schedule VDA in the ITR.

Therefore, the gains from trading, selling, or swapping cryptocurrency will be taxed at a flat 30% (plus a 4% surcharge), irrespective of whether the income is treated as capital gains or business income. 

In addition to this tax, 1% TDS will also apply on the sale of crypto assets of more than Rs 50,000 (or Rs 10,000 in certain cases).

Which Crypto Transactions are Liable to Tax in India?

If you engage in any of the following transactions, you will be required to pay a 30% tax:

• Spending cryptocurrencies to purchase goods or services.
• Exchanging cryptocurrencies for other cryptocurrencies
• Trading cryptocurrency using fiat currency such as ₹(INR)
• Receive cryptocurrency as payment for a service
• Receiving cryptocurrency as a gift
• Mining cryptocurrency
• Drawing a salary in crypto
• Staking crypto and earning stake benefits
• Receiving Airdrops

How to Calculate Tax on Crypto?

Now that you know you'll have to pay a 30% tax on your profits from crypto, let us see how to calculate the profits.

Gains are nothing but Sale Price - Cost Price. 

Crypto Bookkeeping

The computation of tax on crypto, when you have a large amount of transactions in different exchanges and wallets, will be quite complex. Thus one needs to implement crypto bookkeeping software to manage and consolidate all such transactions. This will help you generate reports like capital gain reports, Holding reports etc. It involves the following 

1. Importing all transactions like deposits, withdrawals, Trades etc., from different exchanges and wallets.
2. The software will automatically recognise transactions like deposits, withdrawals, staking income, trades etc.
3. Pending entries for categorisation need to be classified. 
4. The last stage is closing balance verification. This ensures that the closing balance, as per actual holdings, matches the books.

Understanding TDS on Crypto Transactions

• Tax Deducted at Source (TDS) aims to tax the crypto traders and investors as and when they carry out a transaction by deducting a certain percentage at the source. The TDS rate for crypto is set at 1%.
• The following table presents the TDS compliances related to crypto transactions:

Non-Applicability of 194S TDS on VDA: 

• It is important to note that TDS under Section 194S is applicable at the time of purchase of VDA from an Indian Tax Resident only. 
• Thus if you are Trading in an International exchange, DEX, you will be interacting with a non-resident or non-resident entity, then one can take a stand that Section 194S is not applicable.

Tax on Airdrops

• An airdrop refers to the process of distributing cryptocurrency tokens or coins directly to specific wallet addresses, generally without consideration. 
• Airdrops are done to increase awareness about the token and increase liquidity in the early stages of a new currency. 
• Airdrops are taxed at 30%. Such airdrops are taxable under Income from other sources. 

On What Amount will the Airdrops be Taxed? 

Receiving crypto: Airdrops will be taxed on the value determined as per Rule 11UA, i.e. at the fair market value of the tokens as on the date of receipt on exchanges or DEXes. Tax will be levied at normal slab rates.

Sell, swap, or spend them later: If you sell, swap or spend those tokens later, then a 30% tax will be levied on the gains made. The amount which was taxed earlier can be claimed as cost of acquisition.

E.g: 
1) Let’s say Mr Bob receives 20,000 ABC tokens as Airdrop on April 01 2022, but these tokens do not trade either on exchanges or DEXs. Then, no tax will be levied.

2) Now, let’s assume Mr Bob receives 20,000 ABC tokens as an Airdrop on April 01, 2022, too, and ABC tokens are traded (exchanging, buying, or selling) on exchanges or DEXes. On April 01, 2022, the ABC token price on the exchange is ₹10.

• In this case, the tax will be charged at 30% on Rs 2,00,000 (20,000* Rs 10).
• Now, if Mr Bob sells these tokens at Rs 5,00,000, then Rs 2,00,000 will be considered as a cost, and the balance of Rs 3,00,000 will be taxable at 30%.

Tax on Mining Cryptocurrency

• Mining refers to the process of verifying and recording transactions on a blockchain network 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 is rewarded with a certain amount of cryptocurrency, which varies depending on the network. 
• Mining income received will be taxed at a flat 30%. 
• The cost of acquisition for crypto mining will be considered ‘Zero’ for computing the gains at the time of sale. 
• No expenses such as electricity or infra cost can be included in the cost of acquisition. 

On what Amount will Crypto Mining be Taxed? 

Receiving crypto: Crypto assets received at the time of mining will be taxed on the value determined as per Rule 11UA, i.e. at the fair market value of the tokens as on the date of receipt on exchanges or DEXes. Tax will be levied at 30% on such value.

Sell, swap, or spend them later: If you sell, swap or spend those assets later, a 30% tax will be levied on the gains made.

Tax on Crypto Staking/Forging

• In the realm of cryptocurrencies, forging (or minting) refers to the process of generating new blocks in the blockchain using the Proof-of-Stake algorithm in exchange for rewards in the form of newly generated cryptocurrencies and commission fees.
• If you stake cryptocurrency, you may have to pay taxes on your earnings. The amount you earn from staking depends on the Annual Percentage Rate (APR) offered by the validator. For instance, if you stake 100 coins with a 10% APR, you will earn 10% interest every year.
• This income you earn from staking will be taxed at 30%. 
• When you sell your crypto asset, you will be liable to pay 30% Capital Gains Tax.

In general, transferring your coins to a staking pool or wallet does not typically attract taxes. Additionally, moving assets between wallets is often considered tax-exempt. 

Tax on Crypto Gifts

• Tax treatment on gifts differs depending on whether it is money, immovable property or movable property. In Budget 2022, VDAs were included within the scope of movable properties. 
• Therefore, crypto gifts received will be taxed as ‘Income From Other Sources’ at regular slab rates if the total value of gifts is more than Rs 50,000.
• Crypto received as gifts from relatives will be tax-exempt. However, if the value of the crypto gift from a non-relative exceeds Rs 50,000, it becomes taxable. 
• Gifts received on special occasions, through inheritance or will, marriage, or in contemplation of death, are also exempt from taxes.

Cryptos can be gifted either through gift cards, crypto tokens or crypto paper wallets. 

You can use ClearTax's Crypto Tax feature to calculate taxes on cryptocurrencies received as gifts.

Loss from Crypto Transactions

• As per Section 115BBH, losses incurred in crypto cannot be offset against any income, including gains from cryptocurrency. So, a crypto investor cannot off set previous year losses from a crypto asset while filing ITR this year.
• Moreover, Indian investors in cryptocurrency are not permitted to claim expenses related to their crypto activities, except for the acquisition cost or purchase cost.

Eg: Mr X purchased Rs 60,000 worth of Bitcoins and later sold it for Rs 80,000. He also bought Ethereum worth Rs 40,000 and sold them for Rs 30,000. The exchange charged a trading fee of Rs 1,000. The tax on both these transactions shall be computed as under:

Here, Rs 10,000 loss is not allowed to be offset against the gains of Rs 20,000. The entire Rs 20,000 income is taxed at 30%. Also, the trading fee of Rs 1,000 is not allowed as a deduction.

Summary of Crypto Transactions and the Applicable Rate

Timeline Of Crypto Tax Regulations In India

Still unsure about how to calculate taxes on your crypto transactions?
With ClearTax, crypto tax filing becomes effortless. Our platform is integrated with major crypto exchanges, allowing you to automatically import your trading data. Taxes are then calculated for you — quickly and accurately — so you can file with confidence and ease.