Updated on: Jun 7th, 2023
22 min read
A cryptocurrency can be defined as a decentralised digital asset and a medium of exchange based on blockchain technology.
In layman language, cryptocurrencies are digital currencies designed to buy goods and services, similar to other currencies. However, since the beginning, it has largely been controversial due to its decentralised nature, meaning its 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.
Crypto and NFTs were categorized 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 it will not include gift cards or vouchers.
Yes, gains from cryptocurrency are taxable in India. The government's official stance on cryptocurrencies and other VDAs, was clarified in the 2022 Budget.
In India, cryptocurrencies are classified as virtual digital assets and are subject to taxation.
Therefore, gains from trading, selling, or swapping cryptocurrency will be taxed at flat 30% (plus a 4% surcharge) irrespective of whether the income is treated as capital gains or business income.
Other than this tax, 1% TDS will also apply on sale of crypto assets of more than Rs 50,000 (or Rs 10,000 in certain cases).
Use our crypto tax calculator to calculate your taxes easily.
If you engage in any of the following transactions, you will be required to pay a 30% tax:
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
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. A buyer who owes a payment to the seller must subtract the TDS amount and forward it to the central government. Only the balance amount will be paid to the seller. In India, the TDS rate for crypto is set at 1%. Starting from July 01, 2022, the buyer will be responsible for deducting TDS at the 1% rate while making payment to the seller for the transfer of Crypto/NFT. If the transaction takes place on an exchange, then the exchange may deduct the TDS and pay the balance to the seller. Indian exchanges automatically deduct TDS, while individuals trading on foreign exchanges must manually deduct TDS and file their TDS returns.
An airdrop refers to the process of distributing cryptocurrency tokens or coin directly to specific wallet addresses, generally for free. 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%.
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 30% on such value.
Sell, swap, or spend them later: If you sell, swap or spend those tokens later, then 30% tax will be levied on the gains made.
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 Airdrop on April 01, 2022, too and ABC tokens are traded (exchanging, buying or selling) on exchanges or DEXes. On April 01, 2022, ABC token price on the exchange is ₹10.
Mining refers to the process of verifying and recording transactions on a blockchain network through the use of 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 flat 30%.
Mining income received will be taxed at flat 30%. The cost of acquisition for the crypto mining will be considered as ‘Zero’ for computing the gains at the time of sale. No expenses such as electricity cost or infra cost can be included in the cost of acquisition.
Receiving crypto: Crypto asset 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, 30% tax will be levied on the gains made.
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%. Additionally, 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 treatment on gifts differ based 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.
Cryptos can be gifted either through gift cards, crypto tokens or crypto paper wallet.
Crypto received as gifts from relative 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.
You can use ClearTax's Crypto Tax feature to calculate taxes on cryptocurrencies received as gifts.
As per Section 115BBH, any 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 has 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:
|Currency||Buy (in Rs)||Sell (in Rs)||Net Profit or (Loss)||Tax Rate||Tax Amount|
Here, Rs 10,000 loss is not allowed to be offset against the gains of Rs 20,000. Entire Rs 20,000 income is taxed at 30%. Also, the trading fee of Rs 1,000 is not allowed as a deduction
Ministry of Corporate Affairs (MCA) has made it mandatory to disclose gains and losses in virtual currencies. Also, the value of cryptocurrency as on the balance sheet date is to be reported. Accordingly, changes have been made in schedule III of the Companies Act starting from 1 April 2021. This mandate can be considered as the first move of the government towards regulating cryptocurrencies.
Please note that this mandate is only for companies, and no such compliance is required from the individual taxpayers. However, reporting and paying taxes on the gains on cryptocurrency is a must for all.
|2013||A circular was released by the RBI which advised investors to exercise caution when considering speculative investments, including cryptocurrencies.|
|2018||Despite the RBI's numerous warnings, the Indian crypto markets continued to gather momentum and attracted a record number of users. In order to prevent this trend from taking a huge leap, the RBI released a circular in April 2018, restricting banking facilities to the crypto exchanges.|
|2020||After a nearly two-year legal battle, the Indian Supreme Court ultimately overturned RBI's order, ruling that it was unconstitutional to prohibit trading in cryptocurrencies without any regulatory framework in place. This landmark decision played a significant role in igniting the crypto boom of 2020 and marked a crucial turning point for the struggling Indian crypto market.|
|2022||Union Budget 2022 introduced crypto tax regulations, most important of them being a flat 30% tax on crypto and 1% TDS on sell transactions.|
In India, gains from cryptocurrency are subject to a 30% tax (along with applicable surcharge and 4% cess) under Section 115BBH.
As discussed above, the taxation of crypto gains is determined by the type of transaction. You can use our crypto tax calculator to calculate your taxes accurately and with ease.
30% crypto tax will be levied on the income you made from cryptocurrency which can be calculated as:
Sale Price - Cost Price = Income
For the financial year 2022-23 and assessment year 2023-24, you will need to declare your cryptocurrency taxes using either the ITR-2 form (if reporting as capital gains) or the ITR-3 form (if reporting as business income). The new ITR forms include a specific section 'Schedule VDA' for reporting cryptocurrency gains or income.
As per the standard income tax rules, the gains on the crypto-transactions would become taxable as
(i) Business income or (ii) Capital gains. This classification will depend on the investors’ intention and nature of these transactions.
Business income: If there are frequent trades and high volumes, gains from the cryptocurrency may be categorised as ‘business income’. In such a case, you may use ITR-3 for reporting the crypto gains.
Capital gains: On the other hand, if the primary reason for owning the cryptocurrency is to benefit from long-term appreciation in value, then the gains would be classified as 'capital gains'. In this case, you may use ITR-2 for reporting the crypto gains.
Refer to this page for a detailed explanation on TDS on Cryptocurrency.