All you need to know about crypto taxation in India

Cryptocurrencies have entered mainstream conversations in India and are recognised as legitimate investments that are subject to taxes. Cryptocurrencies are treated as Alternative investment assets and are preferred by investors who have the propensity to assume high risk.

Cryptocurrencies are the fundamental blocks of Decentralised Financial systems and offer numerous advantages such as democratised ownership, security and privacy. Moreover, they operates on borderless and intermediary- free networks based on blockchain technology. 

From the last fiscal year, crypto users in India declared their investments and paid taxes on gains from crypto transactions. Essentially, anyone who dealt with crypto had to disclose and pay taxes at 30% on the total of the gains earned. However, to a non-crypto native, crypto taxation in India could be a bit difficult to comprehend. 

Breaking downrypto taxation in India

 The Union government bought crypto transactions under the ambit of Direct tax laws by introducing Section 115BBH in the Budget 2022 (applicable from the current assessment year). A tax rate of 30% (exclusive of surcharges and a 4% cess) was introduced for gains on crypto transactions  Section 115BBH applies to all transactions that are covered under the definition  of transfer under Section 2(47A) of the Act.

Moreover, the 30% tax is applicable without distinction on short-term and long-term gains.

With effect from 1st July 2022, a 1% tax deductible at source (TDS) was also introduced on crypto transactions. It meant that anyone who is paying a consideration for acquiring cryptocurrencies   would have to deductTDS. In case of transactions through centralised exchanges, the onus of deducting and depositing TDS with the government as per applicable norms lies with the exchange. At the time of filing IT returns, this TDS can be claimed and offset against No TDS will be deducted if users deposit/withdraw money or cryptocurrencies from an exchange.

The TDS under section 194S applies to all transfer of VDAs, including crypto-to-crypto trades. One has to pay 1% TDS on while acquiring crypto assets over Rs 10000 (this limit is Rs.50000 if you have no business income or if your business income or professional receipts do not exceed Rs 1 cr. or Rs. 50 lakh respectively)  s.

Fixing the tax conundrum

When one buys or receives cryptocurrency, it is essential to determine the cost basis, i.e., the amount one paid for it or its fair market value in INR on the day they received it. It is used to compute the profit/loss when one sells the asset and does not include additional fees. 

For crypto-asset sellers, it is essential to subtract the cost basis from the sale price to compute profits/losses. Therefore, if one disposes of crypto assets by trading or spending, one should remove the cost basis from the fair market value in Rs on the day it was disposed of.

Managing multiple crypto assets can be complicated, and some fintech platforms offer tax engines to help investors calculate their gains or losses. These platforms use different accounting methods, such as first in, first out (FIFO) and average cost basis, which are accepted in India. These methods help investors keep track of their cost basis and minimise the complexity of calculating their taxes. It helps them save taxes and remain compliant.

Tax treatment of Specific Crypto Transactions

There are several transactions in the cryptocurrency sphere for whom there is no clarity or specific provision under which taxes can be levied under the Income Tax Act. In the absence of specific provisions, the tax treatment of each transaction is decided by the substance of the transaction. For example,crypto miners who receive cryptocurrencies as a consideration for performing the activities of crypto mining have to declare the market value of the crypto assets received as business income. A similar tax treatment exists for staking rewards. However, in the case of airdrops, airdrops having market value upto Rs.50000 will not be taxed in the hands of the recepient, if the market value exceeds Rs. 50000, then the whole amount is taxable under Section 56(2) i.e, Income from Other sources. 

Here, it is important to remember that when the crypto assets acquired through mining, staking or airdrops are sold, then tax at 30% is levied at the entire consideration amount received. No infrastructure costs pertaining to mining or staking are allowed as deduction

Recent developments

In December, the government declared that entities had paid Rs 60.46 crore in taxes for transactions involving Virtual Digital Assets (VDAs) under Section 194S since the regulations and guidelines were introduced . 

Taxing VDAs such as Non-Fungible Tokens (NFTs), cryptocurrencies, and Decentralised Finance (DeFi) is essential, and more regulations in this space are the need of the hour. .  Per the newly introduced Budget of 2023, the scope of fine and punitive actions under section 271C have been expanded to cover non-deduction of TDS u/s 194S. In the last financial year, under absence of any specific guidelines, crypto investors transacted via P2P transactions and on foreign exchanges to avoid TDS under Section 194S. Now, those investors assuming this route risk facing jail time up to seven years in addition to paying the entire amount of TDS not deducted as a fine.   India assumed the presidency of the G20 group of nations in December 2022 and lately, many encouraging statements have been made by the Finance Minister of India.  The Indian Web3 community was hopeful of the rate of TDS being reduced as the 1% deduction mandated by Section 194S has resulted in a drastic fall in trading volumes, but there were no changes introduced. Though the Budget 2023 did not contain any  reduction in the rates of TDS , the Economic Survey of 2023 contains a forecast and sector analysis of the cryptocurrency and Web3 space in India. Hence, the community is quite hopeful of progressive regulations being introduced, specifically during the tenure of India’s presidency of the G20 group of nations

 Final thoughts

Without specific regulations and clear guidelines, the Web3 and crypto industry will not thrive, hence introducing well thought of laws that promote transparency and compliance is a must. Collaboration with the authorities to develop the ecosystem in India and tap the untapped potential is a must for India to become a leader in the Web3 space. A friendlier tax regime will go a long way in retaining crypto investors and fostering innovation in this space.Recently, crypto exchanges have been brought into the ambit of the Prevention of Money Laundering Act provisions, and the industry has considered this a welcome step in the right direction. As the proponents of disclosure and compliance, this step is positive and sets the context for introducing more comprehensive crypto and Web3 friendly laws in the near future.

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