India – Virtual Digital Assets (Cryptocurrency) || Tax Guide

 

Cryptocurrency is trending and has become a hot new asset class of interest these days, even in spite of its wildly fluctuating value. It can multiply your thousands to lakhs to crores in no time and erode the value to less than 1% in a blink of an eye.

With the phenomenal increase in the number of crypto transactions in Virtual Digital Assets (VDA) and looking at the growing buzz around it, India’s Finance Minister Nirmala Sitharaman’s Union Budget 2022 has introduced a new tax regime “Crypto Tax” for taxation of VDAs. Various circulars and clarifications have been issued by CBDT for providing clarity about taxation.

Now let’s get to some of the queries that might arise in your mind, as a crypto investor!!

What is a Virtual Digital Asset?

Virtual Digital Assets (VDA) are all digital assets transacted on a blockchain, such as non-fungible tokens (NFTs), cryptocurrencies, and other virtual assets. In simple terms, it includes cryptocurrencies, DeFi (decentralised finance) and non-fungible tokens (NFTs), etc. Cryptocurrency is the most popular form of VDA.

But the following shall be excluded: –

(i)               Indian Currency

(ii)             Foreign Currency

(iii)            Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of the virtual digital asset subject to such conditions as may be specified therein

(iv)            it shall not include a non-fungible token whose transfer results in the transfer of ownership of the underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable.

(v)             Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services;

(vi)            Mileage points, reward points, or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate, or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services.

(vii)          Subscription to websites or platforms or applications.

Is the new provision of the Indian income tax act retrospective or prospective?

The newly introduced Crypto Tax (Section 115JBB, of the Income Tax Act 1961), applies to all transactions on or after w.e.f 1st April 2022.

Since it is applicable from 1st April 2022, profits/losses before this are non-taxable?

No, as per Indian income tax law all income earned by the resident is subject to tax unless otherwise stated.

What is a taxable Non-Fungible Tokens (NFT) under the Crypto Tax?

A taxable NFT as per the Income is a token that qualifies to be a virtual digital asset as a non-fungible token within the meaning of sub-clause (a) of clause (47A) of section 2 of the Act but shall not include a non-fungible token whose transfer results in a transfer of ownership of an underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable.

In simple language, NFT which also includes a transfer of legally enforceable ownership of a tangible asset such as a painting or a song is not taxable under the crypto tax. They would be chargeable under normal provisions of the Income Tax Act.

Is the purchase of cryptocurrency taxable?

To answer this, we would need to understand the difference between purchase and exchange or swapping.

So, when an individual is purchasing cryptocurrency via Indian crypto exchanges and in fiat currency (INR Fiat currency of India), then such purchases are non-taxable.

But, if the cryptocurrency is purchased through Indian or foreign crypto exchanges but by other than a fiat currency such as INR (Indian rupee), this would be treated as an exchange or swap of one currency. The transaction would result in a taxable transaction sale of one crypto.  Most common examples are purchases from Bitcoin (BTC), Ethereum (ETH), USDT, Solana, etc.

Is Purchase of Non-Fungible Tokens (NFT) taxable?

Currently, NFTs are not listed on any Indian or foreign exchanges where they can be purchased with fiat currency. Therefore, any purchase of NFT would result in a sale of one cryptocurrency. This means it would result in a taxable transaction.

What are the taxable transactions for a VDA?

As such all the transactions other than the purchase of a VDA from fiat currency, holding of a VDA, transfer from one on your wallet to another wallet of yours, or sending gifts in form of VDA are non-taxable.

Rest all the incomes generated from a VDA might be taxable, such as:

a.     Transfer of a VDA.

b.     Receiving VDAs as gifts

c.      Donation of a VDA

d.     Purchase of any commodity such as car, etc from crypto

e.     Receiving of airdrop

f.       Any income from mining of crypto

g.     Any rewards, liquidity mining, etc

h.     Any income from staking of VDA

What is a transfer of VDA, and when is it subject to taxation?

In the applicable Indian Tax rules, the word “transfer” includes the transaction of Sale, exchange, or relinquishment or the extinguishing of any rights therein.

As we discussed earlier in question 5, cryptocurrency when purchased through Indian or foreign crypto exchanges but by other than a fiat currency such as INR (Indian rupee), would be treated as an exchange or swap of one currency.

Is VDA private and do tax authorities have access to the information?

All the Indian exchanges are required to do your KYC i.e. they would have the details of PAN number (tax identification number in India). It’s better to be tax compliant and declare all the incomes.

Further w.e.f 1st July 2022, all the Indian exchanges are required to deduction TDS ( Tax Deduction at Source) at the rate of 1 percent of the transaction value.

What is the taxation of VDAs till 31.03.2022?

Before the new tax rules (till 31st March 2022), crypto assets could be classified as Stock in Trade and get taxed under the head business income. Often the taxpayers must be mindful that to classify it as business income trading volumes, frequency of trades, etc should be considered. The profits at the end would be taxable at normal applicable slab rates of the taxpayer

In case the digital currency is not in the ambit of stock in trade, it should be considered capital gains. As there was no specific tax rate on the transfer of VDA, any income earned was taxed at a specific rate for capital gains or otherwise at normal slab rates applicable to the taxpayer. i.e. if the taxpayer has held the digital currency for more than 36 months, then the income tax returns the income would be taxed at a flat rate of 20% after indexation benefit on the cost of acquisition. Whereas if held for less than 36 months the income is taxable at normal applicable slab rates of the taxpayer for that financial year.

Any other income earned from crypto trading or crypto industry should be taxed under the head of income from other sources and at normal applicable slab rates of the taxpayer for that financial year.

What is the taxation of VDAs w.e.f 01.04.2022?

After the new tax rules, a flat rate of 30 percent tax has been introduced on any income related to the transfer of VDAs irrespective of the trading volumes, frequency of trades, period of holding, etc. Further, no Losses of one VDA can be set off or adjusted against the profit of another VDA. No losses are even allowed to be carried forward to the next financial year.

Our Finance Minter Nirmala Sitharaman has only addressed the issue of transfer of VDA, incomes such as rewards, airdrops, winnings, etc are still unclear. But as per the Indian tax laws, all incomes should be offered to tax, therefore we suggest that any other income earned from crypto trading or crypto industry should be taxed under the head of Income from other sources and at normal applicable slab rates of the taxpayer for that financial year.

Further, the tax deducted at source of 1 percent is allowed to be set off against the income tax liability of the taxpayer.

Is the mining of cryptocurrency taxable?

Mining is a competitive process which verifies and adds new transactions to the blockchain for a cryptocurrency that uses the proof-of-work (PoW) method. The miner who wins the competition is rewarded with some amount of the currency or transaction fees.

The Indian tax authorities have still not provided any guidance with respect to taxation of mining of crypto assets apart from that cost of infrastructure is not to be included as cost of acquisition. Since all the income earned by the taxpayer in India is taxable, therefore as of now, it is supposed to be taxable based on the fair market value.

Is the staking of cryptocurrency taxable?

Staking of cryptocurrency involves committing your crypto assets to support a blockchain network and confirm transactions. It earns passive income for the asset’s owner.

The Indian tax authorities have still not provided any guidance with respect to taxation of staking of crypto asset.  Since all the income earned by the taxpayer in India is taxable, therefore as of now, income received is supposed to be taxable.

Are airdrops of cryptocurrency taxable?

Crypto airdrops are distribution of digital assets to the public, either by virtue of holding a certain other token or simply by virtue of being an active wallet address on a particular blockchain.

The Indian tax authorities have still not provided any guidance with respect to taxation of airdrops of crypto asset.  Since all the income earned by the taxpayer in India is taxable, therefore as of now, receipt of any new coins (under your control) is supposed to be taxable based on the fair market value of the new coins.

Are hard forks of cryptocurrency taxable?

A hard fork splits a single cryptocurrency into two and results in the validation of blocks and transactions that were previously invalid, or vice-versa. One of the most famous examples of a hard fork was the Bitcoin network’s 2017 fragmentation into two separate chains: Bitcoin (BTC), and a new one, Bitcoin Cash (BCH).

The Indian tax authorities have still not provided any guidance with respect to taxation of airdrops of crypto asset.  Since all the income earned by the taxpayer in India is taxable, therefore as of now, receipt of any new coins is supposed to be taxable based on the fair market value of the new coin.

Any income from liquidity pools of cryptocurrency taxable?

Liquidity pool is a digital pile of cryptocurrency locked in a smart contract. This results in creating liquidity for faster transactions. A major component of a liquidity pool are automated market makers.

The Indian tax authorities have still not provided any guidance with respect to taxation of yield generated on liquidity pool of crypto holdings.  Since all the income earned by the taxpayer in India is taxable, therefore as of now, yield on the crypto holdings is supposed to be taxable based on the fair market value of the coin.

How are capital gains computed?

BEFORE THE CRYPTO TAX,

Computation of profits/losses

·       The cost of acquisition is reduced from the sale value to arrive at the profits/losses

·       In the case of Long term (holding more than 36 months), the Indexed cost of acquisition is reduced from the sale value to arrive at the profits/losses

Tax Rate

The taxpayer has held the digital currency for more than 36 months, then the income tax returns the income would be taxed at a flat rate of 20% after indexation benefit on the cost of acquisition. Whereas if held for less than 36 months the income is taxable at normal applicable slab rates of the taxpayer for that financial year.

After THE CRYPTO TAX,

Computation of profits/losses

·       The cost of acquisition is reduced from the sale value to arrive at the profits/losses

Tax Rate

After the new tax rules, a flat rate of 30 percent tax has been introduced on any income related to the transfer of VDAs irrespective of the period of Holding.

What method of accounting should be used?

Section 45 of the Income Tax Act specifies for any securities FIFO method shall be adopted to reckon the period of the holding and cost of the security, in cases where the dates of purchase and sale cannot be correlated through specific number of assets.

Is crypto such as Bitcoin and Ethereum banned by RBI (Central Bank of India)?

No, the central bank has clarified that RBI circular dated April 06, 2018. was set aside by the Hon’ble Supreme Court on March 04, 2020 and is no longer valid from the date of the Supreme Court judgment.

Further, as per the Union Budget, it is proposed that RBI would be issuing a digital currency. FM in New Delhi, cited “a currency is a currency only when it is issued by the central bank even if it is a crypto.”

Are there any deductions available?

Before the new tax rules, when taxed as capital gains benefits under sections 54 and 54 EC would be available to the taxpayer.

But after the new tax rules, no such deduction would be available, the tax rules are even silent on deduction under section 87A.

What is included in the cost of acquisition?

The cost of acquisition for a crypto asset is the amount paid when the taxpayer originally acquired the asset. It would further include all the directly relatable expenses incurred in connection with said purchase.

But, It is highly debatable to include fees such as gas fees, liquidity provider fees, etc.

What is fiat currency?

Fiat currency is a government-issued currency not backed by any commodity like gold or silver. The most common examples of fiat currency are Indian Rupee, US Dollar, and Euro. 

Though countries such as El Salvador have adopted Bitcoin as legal tender still it is debatable that it can be considered a fiat currency.

Is the swap of one currency for another currency taxable?

Yes, the exchange or swap of one currency would result in a taxable transaction sale of one crypto.  Most common examples are purchases from Bitcoin (BTC), Ethereum (ETH), USDT, Solana, etc.

Doing this with a spreadsheet is extremely difficult and cumbersome. Due to high volume and multiple data collation, you should use portals such as Accointing.com.

Are donations made in the form of VDAs taxable?

Yes, it should be treated as a transfer crypto and should be a taxable event.

If the entity receiving crypto assets is registered under section 80G, you would be allowed exemption under income tax act. Generally, it is 50% of the amount donated, in exceptional cases it is 100%.

Are gifts in the form of VDAs Taxable?

The gifting of VDA is not taxable in the hand of the person sending the gift, whereas it might be taxable in the hands of receiver. Refer to Question “are gifts received in the form of VDAs Taxable

Are gifts received in the form of VDAs taxable?

Yes, gifts received in the form of VDA are taxable with the below exceptions:  

1.    an aggregate fair market value of gifts received in any other mode in the financial year is less than INR 50,000 or,

2.    received from a relative as per the definition under section 56 of the Income Tax Act

3.    on the marriage of the taxpayer; or

4.    under a will or by way of inheritance; or

5.    in contemplation of death of the payer; or

6.    from any local authority as defined in the Explanation to clause (20) of section 10; or

7.    from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or

8.    from any trust or institution registered under section 12AA or section 12AB].

9.    by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10

Are paid fees, such as gas fees, to be considered as the cost of acquisition?

Only directly relatable expenses incurred in connection with such purchase are allowed as the cost of acquisition.

As such Gas fees and liquidity provider fees are not directly relatable to the transaction of purchase. it is not advisable to include fees such as the cost of acquisition.  

What is withholding tax (Tax Deduction at Source) and at what rate TDS is deductible?

W.e.f 1st July 2022, all the Indian exchanges are required to deduction TDS (Tax Deduction at Source) at the rate of 1 percent of the transaction value.

Further, the tax deducted at source of 1 percent is allowed to be set off against the income tax liability of the taxpayer. In simple words, it can be treated as an Advance tax paid by you.

Is GST (Good and Services Tax) liable to be paid on VDA?

Currently, the transactions of sale and purchase of VDA are not under the ambit of GST. But, if an individual received VDA as a mode of payment for the transfer of goods or providing service, then the GST might be triggered.

Do I declare VDAs as foreign assets while filing tax returns?

As per Indian tax laws, you are required to declare all foreign assets held by a taxpayer. So, while filing your tax returns, you should declare all the holding as on 31st March of VDAs at cost price. 

Is HODLing taxable?

When an income is earned by the taxpayer then it is subject to taxation. So, holding VDAs would not be subject to tax.

In the past India had the concept of wealth tax to the tune of 1% on the net wealth in excess of Rs. 30,00,000. This was abolished back in 2015 (refer to Union Budget 2015).

If I only HODL and don’t trade my crypto, do I have to report crypto taxes?

As per Indian tax laws, you are required to declare all foreign assets held by a taxpayer. So, while filing your tax returns, you should declare all the holding of VDAs at cost price. 

When is the due date for filing tax returns in India?

In case of assesses who are not liable to audit under any law prevailing in India the due date would be 31st July of the of the next year.

In case the assesses who are liable to transfer pricing audit 31st November of the of the next year

In case the assesses who are liable under any other audit 30th September of the of the next year.

Can I use my losses and if yes to what extent?

As per new crypto tax laws, you are not allowed to set of any losses of other crypto assets nor allowed to carry forward any losses. Only profits and losses of the same coin would be allowed to set off. 

Scams, theft, lost crypto – can you deduct any of these losses?

The Indian tax authorities have still not provided any guidance with respect to taxation of scams, theft, lost crypto of crypto asset.  Since you are not allowed to set of any losses of other crypto assets nor allowed to carry forward any losses, it should not be allowed to be deducted.

How can I reduce my taxable income?

As per the new crypto laws, you are not allowed to set of any losses of other crypto assets nor allowed to carry forward any losses. Only profits and losses of the same coin would be allowed to set off.

The only way to reduce taxable income is to monitor your crypto assets profits on platform such as ours Accointing and vigilantly book losses to set of gain of one crypto assets. 

Do I have to connect all my wallets or only the exchanges on which I trade?

For Accointing.com to provide you with an accurate tax report, it is critical that you connect all your wallets and exchanges, including cold storage wallets. Your crypto taxes are dependent on all your transactions, so if you don’t connect a wallet, we won’t be able to identify the non-taxable transfer, nor will you be able to track the tax basis of the crypto.

I file using XYZ, how can I use Accointing to file my crypto taxes?

Accointing.com is designed to be the most user-friendly crypto tax software out there. You can easily connect all your wallets and exchanges and track your crypto portfolio with our iOS or Android apps. When it’s time for taxes, you can simply download your tax reports, including tool-specific import files, to be able to use your favorite tax tool with Accointing.com.

Finding a crypto tax professional in India – is this advised? what to look for?

Crypto taxes are still developing and, as an individual, it is difficult to keep track of all the updates. It is advised to find a tax professional who has a knowledge of crypto blockchain including taxable activities such as Mining, stalking, airdrops, etc.

It is extremely difficult and cumbersome to keep a track of all transactions as it involves high volume and multiple crypto or currency data collation, you should use a tax professional conversant with portals such as Accointing.com.

I have a trade or business as a trader – what are the tax implications of a crypto trade or business in India?

After the new tax rules, a flat rate of 30 percent tax has been introduced on any income related to the transfer of VDAs irrespective of the trading volumes, frequency of trades, period of holding, etc.

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