Introduction
Cryptocurrency is booming, and so are the ways to get involved. Referral programs are a popular way to incentivize new users, offering free crypto for joining through your link. Sounds great, right? But before you jump in, there’s an important question: how are crypto referral rewards taxed in India?
This blog dives deep into crypto referrals and their tax implications. We’ll break down the current regulations, explain what you need to know, and ensure you navigate the crypto space.
Whether you’re a seasoned crypto referral sigma or an amateur, understanding how taxes work on referral rewards is crucial. So buckle up and get ready to learn how to claim your free crypto while staying compliant with Indian tax laws.
What Are Crypto Referrals?
Crypto referrals are a way for crypto enthusiasts to earn rewards by inviting others to join a platform or service. When you refer someone, they sign up using your unique referral link or code. Once they complete specific actions, such as making a trade or deposit, you and the person you referred receive bonuses or discounts.
Moreover, these referral programs are popular among crypto exchanges, wallets, and other services as they help attract new users while rewarding existing ones.
Hence, leveraging social networks and communities allows you to maximise your earnings through referral incentives, fostering growth within the crypto ecosystem.
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Before understanding how crypto referrals are taxed, let’s dissect the process. Imagine you’re raving about your favourite crypto exchange to your friends. The exchange, recognising the power of word-of-mouth, offers you a reward in the form of cryptocurrency for every friend who signs up using your unique referral code. This is a crypto referral program.
These programs are marketing tools. Crypto exchanges incentivise existing users to spread the word by offering a share of the pie when they bring in new customers. It’s a win-win situation:
- You (the referrer): Earn free crypto for simply recommending the platform to your network.
- Your friend (the referee): You might get a sign-up bonus or other perks for joining through your referral.
- The exchange: Acquires new users at a lower cost than traditional marketing strategies.
Here’s how it typically works:
- You grab your referral code: This could be a unique link, code, or QR code provided by the exchange.
- Please share it with your friends: Use social media, messaging apps, or good old-fashioned conversation.
- Your friend signs up and completes actions: This may involve completing Know Your Customer (KYC) verification, making their first trade, or staking a certain amount of crypto.
- Rewards are distributed: Once your friend fulfils the set criteria, you and your friend receive the promised crypto reward.
But remember, these rewards are considered income, and that’s where the tax implications come into play. Hence, let’s now check for crypto referrals taxed in India.
How Are Crypto Referrals Rewards Taxed in India?
Now that you understand the world of crypto referrals let’s address the elephant in the room: taxes. In India, the government has set its sights on crypto income, and referral rewards are no exception. Here’s a breakdown of the relevant tax categories:
Income Tax
Crypto referral rewards are classified as additional income under the Income Tax Act. Depending on your annual income, they are subject to income tax based on the individual tax bracket, ranging from 0% to 30%. This means you’ll be liable to pay tax on the fair market value of the crypto you receive on the day you receive it. This value is crucial as it determines your taxable income.
Example: On July 1st, 2023, you receive 10 USDT (Tether) as a referral bonus. If the fair market value of 1 USDT on that day is INR 100, your taxable income from the referral reward is INR 1000 (10 USDT * INR 100).
Capital Gains Tax
This tax applies when you sell, swap, or spend the crypto rewards you’ve received. Any profit earned from these transactions will be subject to a CGT, currently a flat 30% in India. In addition to this, you will also pay a 4% health and education cess on the CGT amount. Remember, the acquisition cost is the only deduction for calculating capital gains.
Example: Suppose you hold onto the 10 USDT from the previous example and sell it later for INR 1200. Your capital gain is INR 200 (INR 1200 selling price – INR 1000 referral reward value). This INR 200 will be taxed at the 30% CGT rate, resulting in a tax liability of INR 60. You will also pay a 4% cess on the INR 60; your total taxable amount will be INR 62.4.
Tax Deducted At Source (TDS)
A 1% Tax Deducted at Source (TDS) applies to all crypto transfers, including crypto referral rewards, exceeding INR 50,000 (or INR 10,000 in some instances) within a financial year. The exchange or platform buying the rewards deducts this TDS.
TDS functions as a withholding tax, where you may face additional tax obligations upon filing if your overall tax liability surpasses the deducted TDS. Conversely, if you find yourself without any tax liabilities by the close of the financial year, you’re entitled to reclaim the TDS amount.
Applicable Tax Clauses
While the previous section provided a general understanding of how crypto referrals are taxed in India, specific tax clauses directly impact this income. Let’s delve deeper into the relevant legal framework:
1. Rule 11UA
This rule applies to income from other sources (IFOS), the category under which crypto referral rewards fall. It states that any income not covered by other tax heads (like salary or business income) is taxable under IFOS. This means the fair market value of your referral reward on the day of receipt is added to your total taxable income and taxed at your applicable income tax slab rate (ranging from 0% to 30%).
2. Section 115 BBH
Introduced in the 2022 budget, this section specifically addresses the taxation of income from the transfer of virtual digital assets (VDAs), which includes cryptocurrencies. It imposes a flat 30% tax on any profit earned from selling, swapping, or spending crypto assets, regardless of the holding period (short-term or long-term). Remember, this tax applies in addition to the income tax you already paid on the initial referral reward value under Rule 11UA.
3. Section 194S
This section deals with Tax Deducted at Source (TDS). While currently not directly applicable to crypto referral rewards, knowing its existence is crucial. Introduced in July 2022, Section 194S mandates a 1% TDS on any purchase of crypto assets exceeding INR 10,000 (INR 50,000 in some instances). This provision aims to improve crypto transaction tracking and might be expanded.
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How Do You Calculate Taxes On Crypto Referrals Rewards?
Now that you’ve grasped the relevant tax framework let’s get down to the nitty-gritty: calculating the actual tax you owe on your crypto referral rewards. We’ll explore two key aspects:
Calculating Income Tax (IT)
- Step 1: Determine the fair market value: Find the market value of the cryptocurrency you received as a referral reward on the date you received it. You can use reliable crypto price trackers or exchange data to find this value.
- Step 2: Add it to your income: The fair market value becomes part of your taxable income under the “Income from other sources” (IFOS) category.
- Step 3: Apply your tax slab rate: India’s income tax operates on a slab system. Based on your total taxable income (including the referral reward value), you’ll be subject to a specific tax rate ranging from 0% to 30%.
Calculating Capital Gains Tax (CGT)
This applies if you sell, swap, or spend the crypto you received as a referral reward. Here’s how to calculate the CGT:
- Step 1: Find the selling price: This is the amount you receive when you dispose of the crypto.
- Step 2: Subtract the referral reward value: This represents the original crypto acquisition cost.
- Step 3: Apply the 30% CGT rate: The current flat tax rate of 30% applies to any profit earned on crypto transactions in India.
Real-Life Scenario
Meet Priya, a crypto enthusiast from India. She actively participates in a crypto trading platform offering new users referral rewards. In June 2023, she received 5 BNB (Binance Coin) as a referral reward.
The fair market value of 1 BNB on that day is INR 25,000. Therefore, her reward’s fair market value is INR 125,000 (5 BNB * INR 25,000). This INR 125,000 will be added to her ITR under the IFOS (income from other sources) section.
Now, let’s say she sold the 5 BNB received as a referral reward (worth INR 125,000) for INR 150,000. Her capital gain will be INR 25,000 (INR 150,000 selling price – INR 125,000 referral reward value). She must pay a capital gains tax of INR 7,500 (INR 25,000 * 30%). A 4% cess will also apply on INR 7,500, taking her tax liability to INR 7800.
The buyer/exchange purchasing the BNB tokens also deducts a 1% TDS on the total sale value, i.e., INR 150,000. Hence, the TDS deducted in this case will be INR 1,500. Priya can claim this TDS amount back if she has no tax liability while filing her ITR. If she has a tax liability, then this INR 1500 will be allowed as a tax credit.
KoinX In Action
Calculating taxes on crypto transactions, especially considering referral rewards, can be daunting. Here’s where KoinX, a user-friendly crypto tax platform, simplifies the process.
KoinX acts as a one-stop solution for managing your crypto tax obligations. It streamlines the calculation process and ensures you comply with the latest regulations.
Here’s how KoinX can specifically help with crypto referral taxes:
- Effortless Data Import: Connect your crypto exchanges and wallets to KoinX. It automatically imports your transaction history, eliminating the need for manual data entry.
- Automated Calculations: KoinX categorises your transactions, including referral rewards, and accurately calculates your income and capital gains tax based on the relevant Indian tax regulations.
- Fair Market Value Tracking: KoinX integrates with reliable market data sources to determine the fair market value of your crypto rewards on the day you receive them. This ensures accurate income tax calculation.
- Tax Report Generation: Generate comprehensive tax reports that detail your crypto income, including referral rewards, capital gains, and losses. These reports can be easily shared with your tax advisor or used for self-filing.
Ready to ditch the spreadsheets and embrace stress-free crypto tax filing? Join KoinX today and explore how our platform can simplify your crypto tax journey.
Conclusion
So, there you have it! Crypto referrals can be a great way to earn some additional crypto, but remember, with those rewards comes the responsibility to understand and fulfil your tax obligations. We’ve covered how crypto referrals are taxed in India and the relevant tax clauses (Rule 11UA, Section 115 BBH, Section 194S). We have also explained how to calculate income and capital gains tax so that you can better understand the taxes.
Remember, navigating the complexities of crypto tax can be challenging. A platform like KoinX can significantly ease the burden by automating calculations, providing detailed reports, and ensuring you have the documentation for smooth tax filing.
