India Crypto Tax: A Guide for Chartered Accountants

CA

The meteoric rise of cryptocurrencies has brought exciting opportunities and complex tax implications. Navigating this dynamic landscape can be daunting for chartered accountants (CAs) in India. Fear not! This blog is your one-stop shop for understanding and mastering crypto tax in India.

Here, you’ll find in-depth explanations of critical regulations like Section 115BBH and 194S and practical guidance on reporting crypto income, calculating tax liabilities, and handling TDS deductions. We’ll delve into nuanced scenarios, address emerging challenges, and equip you with the latest insights to advise your clients confidently.

This guide is your trusted companion. Stay informed, stay compliant, and empower your clients to navigate the exciting world of crypto taxation with clarity. So, buckle up, CAs, and let’s demystify the crypto tax landscape together!

How Is Cryptocurrency Taxed In India?

Before 2022, India had no tax regulations concerning cryptocurrencies or other virtual assets. However, changes arrived with the 2022 financial budget, introducing taxation on crypto transactions.

India now categorises crypto as a taxable virtual digital asset. This means individuals are subject to a 30% tax on profits earned from trading cryptocurrencies.

  • Section 2(47A) was added to the Income Tax Act, providing a clear definition and classification for Virtual Digital Assets.
  • Section 115BBH was introduced in the 2022 budget to impose a 30% tax on cryptocurrency trading profits starting April 1, 2022.
  • Additionally, Section 194S mandates a 1% Tax at Source on crypto asset transfers exceeding INR 50,000 (or even INR 10,000 in some cases) from July 01, 2022. 
  • TDS applies to private investors, commercial traders, and anyone transferring digital assets in a financial year.

The TDS rate is uniform and applies regardless of an investor’s income or the duration of asset ownership (short-term or long-term gains).

Starting July 01, 2022, under Section 194S of the IT Act, buyers must deduct 1% TDS when paying sellers for crypto/NFT transfers. If the transaction occurs on an Indian exchange, the exchange handles the TDS deduction and disburses the balance to the seller, relieving the buyer of this responsibility.

These tax regulations equally impact both businesses and individuals engaged in crypto transactions. Every crypto transfer incurs a 1% TDS charge nationwide on or after July 1, 2022.

TDS On Cryptocurrency

As per the recent regulations set forth by the Indian Tax Department (ITD), a 1% tax deducted at source (TDS) will be applicable when transferring crypto assets. TDS, functioning as a tax deducted at the source, has been implemented primarily to facilitate the tracking of investment activities in crypto holdings by Indian investors.

It’s crucial to clarify that in crypto transactions, ‘transfer’ denotes any change in ownership, encompassing sales, trades, or spending, rather than mere transfers between wallets.

Several vital points merit attention regarding crypto TDS:

  • The 1% TDS is effective from July 1st, 2022.
  • When engaging in transactions on Indian exchanges, the TDS will be deducted by the exchanges and remitted to the government.
  •  In instances involving trading through peer-to-peer (P2P) platforms or international exchanges, the responsibility of deducting TDS lies with the buyer.
  • In crypto-to-crypto trades, TDS will apply to both the buyer and seller at a rate of 1%.
  • Adding complexity to the matter, no TDS deduction is mandated if the consideration is payable by a “specified person,” provided the aggregate value of their crypto trading activities remains below Rs 50,000 within a single financial year.

Income Tax On Crypto Transactions

The ITD may consider your cryptocurrency transactions taxable income. In such cases, you must pay taxes at the individual tax rate upon receiving the income. This applies to various scenarios, including:

  • Receiving crypto as a gift
  • Mining crypto coins 
  • Receiving payment in cryptocurrency.
  • Earning staking rewards.
  • Receiving airdrops.

If you later decide to sell, trade or use the tokens acquired through the above scenarios, you will have to pay a CGT tax of 30% on any gains you make. 

Individual Tax Rates For FY 2023-2024

Here’s the new tax slab presented in the budget for 2023 for people aged up to 60. 

Tax Slab

Rates

Up to Rs. 3,00,000

NIL

Rs. 300,000 to Rs. 6,00,000

5% on income which exceeds Rs 3,00,000

Rs. 6,00,000 to Rs. 900,000

Rs 15,000 + 10% on income more than Rs 6,00,000

Rs. 9,00,000 to Rs. 12,00,000

Rs 45,000 + 15% on income more than Rs 9,00,000

Rs. 12,00,000 to Rs. 1500,000

Rs 90,000 + 20% on income more than Rs 12,00,000

Above Rs. 15,00,000

Rs 150,000 + 30% on income more than Rs 15,00,000

Income Tax Slab For Citizens Aged Between 60 to 80 Years

Tax Slabs

Rates

Rs. 2.5 lakhs

NIL

Rs. 2.5 lakhs – Rs. 3 lakhs

NIL

Rs. 3 lakhs – Rs. 5 lakhs

5.00%

Rs. 5 lakhs – Rs. 10 lakhs

20.00%

Rs. 10 lakhs and more

30.00%

Income Tax Slab For Citizens Aged Above 80 Years

Tax Slabs

Rates

Rs. 0 – Rs. 5 lakhs

NIL

Rs. 5 lakhs – Rs. 10 lakhs

20.00%

Above Rs. 10 lakhs

30.00%

Which Crypto Transactions Are Subject To Crypto Tax in India?

In India, the majority of crypto transactions are liable for crypto taxes. Here’s is a list of all the transactions and their tax implications in India: 

Transaction

Tax

Buying crypto

1% TDS, usually deducted by the exchange (excluding international & P2P trades)

Selling crypto

30% tax + 4% cess on any gain

Trading crypto for crypto

30% tax + 4% cess on any gain

Moving crypto between your wallets

No Tax Implication

Holding crypto

No Tax Implication

Spending crypto

30% tax + 4% cess on any gain

Hard forks

Income Tax at your tax rate on receipt, 30% tax + 4% cess if sold at a profit

Airdrops of crypto

Income Tax at regular tax rate, 30% tax + 4% cess if sold at a profit.

Donating crypto

Only cash donations are tax-deductible; any perceived profits may be subject to a 30% tax + 4% cess

Gifts of crypto

The recipient is generally taxed, with some exceptions for gifts from close family or under INR 50,000

Staking rewards

Income Tax at regular tax rate, 30% tax + 4% cess if sold at a profit.

Mining rewards

Income Tax at regular tax rate, 30% tax + 4% cess if sold at a profit.

Tax On Crypto Gains

Crypto gains in India are subject to taxation, and chartered accountants must understand how these taxes work. When investors trade or hold cryptocurrencies like Bitcoin, Ethereum, or other virtual digital assets (VDAs), any increase in value over time results in crypto gains. 

These gains can come from various sources, including capital gains, exchanging crypto assets, or using crypto for transactions. In India, crypto gains are taxed at a flat rate of 30%, and a 4% health and education cess is levied.

Tax On Airdrop

Cryptocurrency projects often use airdrops as a marketing strategy to distribute tokens to a broad audience and increase awareness. CAs should note that while Airdrops serve as marketing tools for crypto projects, they trigger tax liabilities for recipients.  

Airdrops in India are subject to taxation and treated as Income from Other Sources (IFOS) since FY 2021-22.

Moreover, a taxpayer will pay 30% CGT and a 4% cess when they sell or dispose of these tokens subsequently at a gain. 

Tax On NFTs

Non-fungible tokens or NFTs are another form of VDAs that are trending. Here’s a simplified breakdown of how NFT transactions are taxed in India:

Purchasing NFTs With Fiat Currencies

Person who acquires NFTs using traditional fiat currencies like INR, USD, or EUR need not worry about tax liabilities to the Income Tax department.

Purchasing NFTs With Cryptocurrencies

However, if someone uses Ethereum (ETH) or Bitcoin (BTC) to buy NFTs, they become subject to taxation. The ITD consider this transaction as the disposal of cryptocurrencies, which attracts a tax rate of 30% plus a 4% cess.

Selling NFTs

Profiting from the sale of NFTs triggers taxation at a flat rate of 30% on the net gain, irrespective of the holding period. A 4% cess applies to this amount, and the buyer deducts a 1% (TDS) on the selling price.

It’s important to note that people can claim back the TDS when filing a tax return if they have no tax liability by the end of the financial year. However, there’s a restriction on deducting or setting off losses incurred from selling NFTs.

Tax On Crypto Mining

Mining Cryptocurrencies can yield profits, but you must comprehend the tax obligations. In India, there are two primary taxation aspects to consider:

Income Tax on Crypto Mining

Your clients’ mining income falls under two categories: Income from Business or Income from other sources, depending on their level of engagement. 

If they’re actively mining crypto for profit, it’s considered a business activity, and the rewards are taxed as Business Income. They can claim deductions for expenses like mining rigs, electricity, and rent, paid INR through their bank.

On the other hand, if mining is more of a hobby for your clients, any rewards they receive are categorised as “Income From Other Sources” in their Income Tax Return (ITR). However, no deductions are applicable in this scenario.

Capital Gains Tax On Disposal of Mining Rewards

When a person sells, swaps, or spends the crypto they’ve mined, any resulting gains are subject to capital gains tax. This tax is levied at a flat rate of 30% on the profit made from the appreciation in the value of the mined cryptocurrency. 

Additionally, they must pay the government a 4% health and education cess.

Note that the crypto exchanges charge a 1% TDS on the selling price when you sell minted tokens. One can claim this TDS as a refund if they have no tax liability upon filing their return.

Tax On Crypto Staking

If a person is earning rewards through crypto staking, here’s how taxation will work: 

Income Tax for Crypto Staking

One must pay taxes on their rewards from staking cryptocurrencies in India. Crypto staking is treated as income, taxed at their applicable income tax rate. 

The Indian tax authorities determine the tax liability for staking rewards based on the cryptocurrency’s fair market value in Indian Rupees (INR) on the date you receive the reward. 

This means they’ll need to pay income tax on the value of the tokens received through staking, regardless of whether they sell them.

Capital Gains Tax For Disposal Of Crypto Staking

Cryptocurrencies are considered assets in India, and any gains from selling or disposing of assets are subject to capital gains tax.

Hence, in addition to income tax on staking rewards, they will be subject to a 30% tax plus a 4% cess on any profits made when they subsequently sell, swap, or spend their staking rewards. 

Furthermore, the buyer must also deduct a 1% Tax Deducted at Source (TDS) on the selling price of the cryptocurrency.

Tax On Minting Crypto

Minting crypto tokens involves the creation of new blocks, authentication of data, and recording information on the blockchain. This process, known as Proof of Stake, generates new tokens without any associated income. 

In India, the taxation of minting crypto tokens is complex. While minting does not trigger taxation, the associated gas fees must be considered. These fees are the only costs incurred during minting and are not subject to taxation according to the 2022 financial budget.

However, it’s crucial to note that alternative interpretations of minting transactions may arise under the Income-tax Act. Therefore, individuals should stay informed about any updates or changes in taxation laws regarding minting activities.

Tax On Gifting Crypto

Regarding gifting cryptocurrency in India, there are tax considerations that you need to be aware of as CAs. While there are exceptions for gifts under a certain threshold or for specific occasions, it’s crucial to understand the tax implications for clients who receive these gifts.

Receiving Gifts Below INR 50,000

A person receiving cryptocurrency gifts worth less than INR 50,000 in a financial year is not subject to taxation.

Gifts from Family Members

Under current gift tax regulations in India, gifts from immediate family members, such as parents or siblings, are exempt from taxation.

Gifts on Special Occasions

Certain circumstances, such as receiving cryptocurrency as a wedding gift or through inheritance or a will, are exempt from taxation.

Receiving Gifts Above INR 50,000

If a client receives a cryptocurrency gift exceeding INR 50,000 in a single financial year, they become liable for Income Tax at their applicable slab rate on the value of that gift.

Tax On Crypto Salary

Drawing salaries in cryptocurrency are subject to taxation in India. So, people who receive wages in cryptocurrency must pay income tax based on the Fair Market Value (FMV) of the cryptocurrency received. Here’s a simplified breakdown:

Income Tax on Crypto Salaries

Suppose your clients receive a salary in cryptocurrency. In that case, the fair market value of the cryptocurrency received in Indian Rupees (INR) on the day of receipt is taxed according to the income tax slab. The applicable tax rate depends on the client’s income tax salary bracket position.

Whether a person transfers cryptocurrency to their bank accounts or uses it in peer-to-peer transactions, it remains taxable in India.

Capital Gains Tax On Disposal Of Crypto Salaries

A person has to pay a Capital Gains Tax only if they satisfy the condition of “Transfer” as mentioned in Section 115BBH of the Income Tax Act:  

A transfer of cryptocurrency can occur through

  • Selling acquired cryptocurrency,
  • Exchanging acquired cryptocurrency for another cryptocurrency,
  • Relinquishing acquired cryptocurrency

If they convert the cryptocurrencies received as salaries into INR or use them to purchase goods or services, such transactions are classified as disposals. They are subject to a flat tax rate of 30%, a 4% cess on the taxable amount and a 1% Tax Deducted at Source (TDS) by the buyer on the selling price of the cryptocurrency.

Tax On Crypto Donations

For people making crypto donations, it’s crucial to note that tax deductions for contributions to charitable institutions are available only through traditional banking channels or in cash up to a limit of RS 2,000.

Since the Indian government doesn’t recognise cryptocurrency as legal tender,, donations made in cryptocurrency won’t qualify for tax deductions. Instead, such generous contributions are treated as asset disposals, and any resulting profits are subject to a CGT of 30% and a 4% cess as a tax rate.

Tax On Crypto Referrals

Before assisting anyone in managing their gains from crypto referrals, it’s imperative to acknowledge the tax implications associated with such transactions in India, per the directives outlined in the Financial Budget 2022.

Crypto referrals pertain to the practice wherein users of a crypto platform or service invite others to join the same platform, often resulting in referral bonuses with monetary value.

Recognising that these referral bonuses constitute additional income for tax purposes and are subject to Income Tax regulations in India is essential. When receiving a bonus in cryptocurrency, you must use its fair market value on the day of receipt to calculate your supplementary income amount.

Subsequently, Any gains accrued from selling, trading, spending, or gifting received crypto are subject to a 30% Capital Gains Tax and a 4% health and education cess.

In the Indian tax framework, referral bonuses are categorised under income from other sources (IFOS), subjecting them to income tax per the applicable slab rate corresponding to the individual’s income bracket.

Tax On Crypto Sales (ICOs and IDOs)

Initial Coin Offerings (ICOs) and Initial DEX Offerings (IDOs) represent avenues through which cryptocurrency projects raise funds from the public by offering tokens for sale. 

These offerings have gained prominence due to their decentralised nature, accessibility, and ability to facilitate faster fundraising with lower entry barriers.

In these transactions, tokens obtained through airdrops or direct purchases are subject to taxation under the Income From Other Sources (IFOS) category.

Anyone receiving tokens through airdrops in exchange for staking a specific token for a designated period is taxed upon receipt. Subsequent capital gains from the sale of these tokens are also taxable.

Moreover, Suppose any individual acquires tokens in many ICOs and IDOs by exchanging cryptocurrencies like USDT or USDC in such cases. In that case, any capital gains arising from the sale of the cryptocurrency used to obtain the tokens, such as USDT, are also subject to taxation.

Tax On Crypto Futures Trading

Crypto futures trading involves the speculative buying or selling of a specified amount of cryptocurrency at a predetermined price for future delivery. This activity allows a person to capitalise on price movements without asset ownership, presenting opportunities and risks due to market volatility.

Initially, there are no immediate tax liabilities when someone exchanges Indian Rupees (INR) for USDT stablecoin to enter the realm of crypto futures trading. However, tax implications arise when they convert their USDT holdings back into INR.

Let’s simplify this process with a practical example. Suppose an individual has accumulated profits from their trading activities and wishes to convert them, denominated in USDT, back into INR. In such instances, they must adhere to the following tax regulations:

30% Tax On Profits

Upon converting USDT back into INR, they must pay a 30% tax on their profits and a 4% cess. It’s essential to note that this tax cannot offset any losses incurred from trading other cryptocurrencies.

1% TDS (Tax Deducted At Source)

A 1% Tax Deducted At Source (TDS) applies to the transaction value of USDT converted back into INR.

Tax On Other Forms Of Crypto Trading

If your client is involved in any form of trading other than futures trading, here’s how taxation will work on their crypto trading transactions: 

Spot Crypto Trading Taxation

Spot crypto trading involves the immediate buying and selling of digital assets. For your clients engaging in spot trading, it’s essential to understand the taxation framework in India.

In India, spot crypto trading attracts a uniform tax rate of 30%, along with a 4% health and education cess under Section 115BBH of the Income Tax Act. This tax sweeps away the distinction between short-term and long-term gains, applying to all assets regardless of how long you hold them..

Furthermore, a 1% Tax Deducted at Source (TDS) is applicable on sale transactions exceeding Rs. 50,000 annually, effective from July 1, 2022. It’s crucial to note that no deductions or exemptions are allowed, except for the acquisition cost of the crypto asset.

Margin Crypto Trading Taxation

Margin crypto trading involves borrowing funds to amplify market exposure. A person venturing into margin trading should be aware of the tax implications.

Profits from closing leveraged positions are subject to a flat 30% tax rate under Section 115BBH of the Income Tax Act. This tax applies to gains from margin trading and crypto derivatives as well.

Losses incurred from margin trading cannot offset other income categories, but can be carried forward for up to eight years. Forced liquidations due to margin calls are considered taxable, with the profit or loss determined by the sale price.

Also, a 1% TDS applies to cryptocurrency transfers exceeding INR 50,000 (INR 10,000 in some cases) annually. It’s essential to advise clients that this TDS is an advance payment, not their final tax liability.

Tax On Lost Or Stolen Cryptos

The Income Tax Department must provide clear guidance on how to treat lost or stolen cryptocurrencies. Court rulings have established that losing crypto to hacking, scams, or theft doesn’t trigger tax liability.

However, it might be difficult for an accountant to claim a loss from a lost or stolen crypto asset against their gains. This is because the ITD has a strict stance on such claims.

One should understand that while there might not be a tax liability for the lost crypto, offsetting losses against gains could be challenging due to the ITD’s stringent approach.

Tax On DeFi Income

The ITD must provide specific guidance on decentralised finance (DeFi) transactions. However, Chartered Accountants need to consider existing rules under the Income Tax Act.

Here are some DeFi transactions that could be subject to taxation for your clients:

  • Earning New Tokens: Someone may receive tokens through liquidity mining, governance activities, or rewards.
  • Referral Rewards: Any rewards obtained through referral programs might be taxable.
  • Play-To-Earn Income: Income from play-to-earn activities within DeFi may be taxable.
  • Browse-to-Earn Platforms: Platforms like Permission.io or Brave, where a person can earn rewards for browsing, may also have tax implications.

Even if they have paid taxes upon receiving the tokens, it’s important to note that they could still be subject to a 30% Capital Gains Tax (CGT) on any profits if they sell, swap, or spend them later.

Tax On Income From Consultancy Services

Suppose your clients earn consultancy income in cryptocurrency. In that case, it falls under the purview of Income From Other Sources (IFOS) and is subject to taxation according to ITD regulations. The applicable tax rate varies depending on the tax bracket, with provisions for claiming relevant deductions.

Moreover, your clients must comply with Goods and Services Tax (GST) obligations if they meet the eligibility criteria. Subsequently, when they sell their tokens, they incur Capital Gains Tax (CGT) at a rate of 30%, along with a 4% cess on the tax amount. 

How Can KoinX Help You In Filing Crypto Taxes in India?

KoinX is an efficient tool designed to simplify tax filing procedures for Chartered Accountants and their clients involved in crypto transactions. Introduced in 2022, KoinX is a user-friendly platform for consumers and crypto tax advisors.

With its intuitive interface and seamless integration with exchanges, KoinX is a leading choice among India’s rapidly growing crypto taxation platforms. Notably, its capability to import tax data offers a significant advantage, facilitating smooth collaboration between clients and their chartered accountants.

KoinX caters to individuals at all levels of expertise, offering a wealth of resources for effective tax management. Its operational process is straightforward:

  • You can download your client’s transaction data from their preferred exchange(s).
  • Upload the CSV files containing these transactions onto KoinX.
  • Receive a comprehensive report detailing all transactions and corresponding tax liabilities.

KoinX streamlines tax calculations, empowering chartered accountants to provide efficient customer services. So why wait? Try KoinX today and get started with the world of crypto taxation. 

Frequently Asked Questions

Let’s answer some of the frequently asked questions about crypto tax India:

Can You Offset Crypto Losses in India?

A person may face challenges regarding losses incurred from crypto investments. Under Section 115BBH, offsetting crypto losses against crypto gains or any other sources of income is prohibited. Additionally, it’s important to note that Indian tax regulations do not permit someone to claim expenses related to crypto transactions, except for the cost of acquisition or purchase price.

What Is The Cost Basis Method Used in India?

In cryptocurrency taxation, managing gains and losses becomes particularly intricate for investors due to the involvement of multiple crypto assets. The challenge lies in accurately tracking the cost basis, determining the assets sold and their respective timing—a critical factor influencing overall gains and losses. In India, adhering to recognised cost-basis methods is paramount. Two prevalent methods, First In, First Out (FIFO) and Average Cost Basis accounting, serve as foundational frameworks for calculating taxable events in cryptocurrency transactions.

What Penalties Apply If A Person Fails To Pay The TDS?

Non-compliance with TDS obligations now carries significant repercussions for crypto traders, potentially leading to substantial penalties and legal consequences. It can lead to severe penalties, including fines up to 100% of TDS value and imprisonment. Section 271C covers penalties for TDS deduction failures, while Section 276B addresses failure to remit TDS to the government, potentially resulting in imprisonment from 3 months to 7 years.

Can The Income Tax Department Track Crypto Transactions?

Domestic exchanges’ KYC data and the 1% Tax Deducted at Source (TDS) are leveraged by the Income Tax Department to bolster tax compliance among crypto investors. This strategic approach facilitates precise tracking of taxpayers’ crypto assets, enabling Chartered Accountants to efficiently access relevant exchange data for comprehensive tax filing and advisory services.

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