Introduction
The Indian crypto landscape is brimming with innovation, and Initial Coin Offerings (ICOs) and Initial DEX Offerings (IDOs) are at the forefront. Both serve as fundraising mechanisms for projects to raise capital by. An investor receives a project’s tokens in return of their investment.
However, with great opportunity comes the responsibility of understanding the tax implications.
The government has set clear guidelines for how taxation works in the sale of cryptos and NFTs. Yet, there are some transactions, such as IDOs and ICOs, whose tax implications still need to be clarified to many.
Hence, this blog deepens into the Indian tax framework surrounding ICOs and IDOs, offering clear and concise information for crypto enthusiasts and industry professionals.
What Are ICOs?
Imagine a brand new company in the exciting world of crypto. They have a groundbreaking idea but need funding to make it a reality. This is where Initial Coin Offerings (ICOs) come in at your rescue.
Think of an ICO as a fundraising event, but instead of selling shares in the company, they create brand new digital tokens. These tokens can be seen as “mini-investments” in the company’s future. Investors buy these tokens with established cryptocurrencies like Bitcoin or Ethereum, giving the company the capital it needs to start.
In return for their investment, the hope is that the tokens will increase in value as the company grows and their project takes off. So, ICOs act as a launchpad for innovative crypto ventures while also offering investors a potential path to financial gain.
What Are IDOs?
ICOs paved the way for another fundraising method: Initial DEX Offerings (IDOs). While similar to ICOs’ goal of raising capital, IDOs function differently.
Let’s break it down. Imagine the same scenario: a new crypto project needs capital. But instead of creating their own separate token sale event, they utilise Decentralized Exchanges (DEXs).
Think of DEXs as marketplaces where people can directly trade cryptocurrencies without a central authority. An IDO leverages this system. The project injects their new tokens into a pool on a DEX, allowing investors to buy them directly using other cryptocurrencies.
How Do ICOs Differ From IDOs?
ICOs and IDOs serve as fundraising methods for crypto ventures but operate under distinct umbrellas. Here’s a breakdown of the key differences:
Platform
ICOs are self-contained events. The project team builds its platform to host the token sale, acting as the middleman between itself and investors.
In contrast, IDOs take advantage of Decentralized Exchanges (DEXs). These are platforms where users directly trade cryptocurrencies without a central authority. An IDO leverages the existing infrastructure of a DEX, integrating its new tokens into the existing liquidity pool.
Intermediary
ICOs need a formal intermediary. Investors directly interact with the project team, raising concerns about potential scams and a lack of oversight.
IDOs, on the other hand, benefit from DEXs’ involvement. While DEXs aren’t necessarily regulatory bodies, their established communities and automated smart contracts offer a layer of security and transparency compared to traditional ICOs.
Accessibility
Anyone with an internet connection can participate in an ICO. However, due to the self-hosted nature, projects may have geographical restrictions or complex participation procedures.
IDOs, by residing on DEXs, inherently boast greater accessibility. Anyone with the necessary cryptocurrency and access to the DEX can participate in the token sale.
Liquidity
ICOs typically don’t guarantee immediate liquidity for the newly issued tokens. Investors might have to wait for the project to gain traction before they can quickly sell their holdings.
IDOs provide instant liquidity through integration with DEXs. Investors can buy and sell the tokens against other listed cryptocurrencies because they are directly added to the DEX’s liquidity pool.
ICOs offer more flexibility for project design but raise concerns about oversight and potential scams.
IDOs, on the other hand, provide a more transparent and accessible fundraising environment through established DEXs but limit project control over the token sale process.
How Are ICOs and IDOs Are Taxed in India?
Now that you know how ICO and IDO work, let’s check their tax implication in India. This section explains the specific tax implications of these transactions:
Income Tax
Generally, the coins from ICOs and IDOs are airdropped to the investor after the confirmation of their investment. The fair market value of the tokens at the date of receipt is summed and added to your annual income as “Income From Other Sources” (IFOS). Depending on the tax regime and the individual slab rate, you must pay an income tax of 0-30%.
Capital Gains Tax
The capital gains tax can be applied twice the deadline for ICOs and IDOs. Here’s how:
Initial Exchange/Disposal Of Tokens To Purchase ICOs & IDOs
When you exchange any of your primary tokens, such as Ethereum and Bitcoins, to purchase a stake at an ICO, this transaction is treated as a crypto disposal and might be liable to taxation. If you have enjoyed a profit from selling these primary tokens, then that gain will be taxed at a flat rate of 30% plus a 4% health and education cess.
Disposal Of Airdroped Token
Moreover, selling tokens received as an ICO or IDO airdrop will attract capital gains. This tax applies if you sell them at a gain at a later stage. The tax rate on the gain remains the same at 30% plus a 4% health and education cess.
Unlike traditional investments, only the cost of acquisition (the original purchase price) can be deducted while calculating taxable income. You cannot deduct expenses incurred as trading fees or other crypto-related activities.
Tax Deducted At Source
A Tax Deducted at Source (TDS) of 1% applies to all cryptocurrency transfers, including referral rewards exceeding INR 50,000 (or INR 10,000 in some instances) within a fiscal year. The exchange or platform facilitating the purchase of these rewards is liable to deduct the TDS.
Applicable Tax Clauses
Now that you understand how ICOs and IDOs are taxed in India, let’s examine the applicable tax clauses in detail.
Rule 11UA
Rule 11UA outlines the method for calculating the taxable income from crypto transactions in India. It specifies that the fair market value (FMV) of the virtual digital asset (VDA) on the date of acquisition or receipt will be used for taxation purposes.
It applies whenever you receive VDAs through means other than purchasing them from a registered dealer. This includes mining and receiving them as gifts or airdrops from ICOs and IDOs.
Section 115 BBH
Section 115BBH, introduced in the financial budget 2022, dictates the tax treatment of income generated from crypto transactions. It levies a flat 30% tax on the gains from the sale, exchange, or transfer of VDAs. You must also pay a 4% health and education fee based on the CGT value. This tax applies to all crypto gains, including short-term and long-term capital gains.
Section 194S
Section 194S mandates a 1% Tax Deducted at Source (TDS) applicable from July 1st, 2022, on crypto transfers exceeding specific thresholds within a financial year.
TDS applies if the total value of crypto transferred during the year surpasses INR 50,000. In some instances, a lower threshold of INR 10,000 might be applicable. The cryptocurrency exchange or any designated person facilitating the transfer or buying of the cryptocurrency is responsible for deducting TDS.
How Do You Calculate The Taxes On IDOs and ICOs in India?
While we’ve explored the relevant tax framework surrounding ICOs and IDOs in India, it’s crucial to understand that calculating the exact tax owed requires careful consideration due to the evolving regulatory landscape. Let’s see how you can calculate the taxes from ICOs and IDOs in India:
Calculating Income Tax (IT)
- Step 1: Establish the fair market value: Determine the current market value of the cryptocurrency received as an ICO/IDO airdrop reward on the date of receipt. Reliable cryptocurrency price trackers or exchange data can help ascertain this value.
- Step 2: Incorporate it into your income: The fair market value is part of your taxable income, falling under the “Income from other sources” (IFOS) category.
- Step 3: Apply your applicable tax slab rate: India’s income tax system operates on a slab basis. Depending on your total taxable income (including the referral reward value), you will be subject to a specific tax rate of 0% to 30%.
Determining Capital Gains Tax
If you decide to sell, swap, or utilise the cryptocurrency received as an ICO and IDO, you must calculate the Capital Gains Tax (CGT) accordingly. Here’s a breakdown:
- Step 1: Determine the selling price: This is the total amount you receive upon disposing of the cryptocurrency.
- Step 2: Calculate Capital Gains: Deduct the selling price from the initial acquisition cost. If the result is positive, then it is a gain; if it’s negative, then it’s a loss.
- Step 3: Apply the CGT rate of 30%. Moreover, a 4% health and education amount will also be charged on the CGT.
Real-Life Scenarios
Rakesh is an active crypto investor. In April 2023, he purchased 0.04 Ethereum tokens for INR 3000. In May 2023, he used these tokens to invest in an ICO of Tamadoge (TAMA) coin. The FMV of 0.04 ETH on the day of exchange was INR 6000.
In return for his investment, TAMA airdropped 500 coins with an FMV of INR 6000. In November 2023, he sold all TAMA tokens at a sale value of INR 10,000, thereby gaining a profit of INR 4,000.
Now, let’s see how taxation functions on the following transactions:
- Income Tax
As per Indian tax regulations, Rakesh needs to report this INR 6000 as “Income From Other Sources” (IFOS) in his annual income tax return.
- Capital Gains Tax
The capital gains tax functions in two different transactions in the above example.
- Capital Gains Tax on the Exchange Of Ethereum
Rakesh bought 0.04 ETH tokens for INR 3,000, which became the cost value of the token. He exchanged it to buy the ICO of TAMA when the FMV of 0.04 ETH was INR 6,000 (the token’s sale value). Now, his capital gains stand as follows:
- Capital Gains Tax on the Exchange Of Ethereum
Capital Gain: Sale Value – Cost Value
Capital Gain = INR 6,000 – INR 3,000 = INR 3,000.
This INR 3,000 will be taxed at a flat rate of 30%. Therefore, the CGT is INR 900 (30% of INR 3000). A 4% health and education cess will also apply to the CGT, thereby taking the final tax liability to INR 936.
- Capital Gains Tax on Sale Of TAMA tokens
Rakesh sold all the TAMA tokens for INR 10,000. In this scenario, the capital gains stands as:
- Capital Gains Tax on Sale Of TAMA tokens
Capital Gains = INR 10,000 – INR 6,000 = INR 4,000
He will have to pay a flat tax rate of 30% on this INR 4,000. His CGT on this transaction stands at INR 1200. Summing up the 4% cess on the CGT amount, his final tax liability will be INR 1248.
KoinX In Action
While the above example may have overwhelmed you with intricate tax calculations, platforms like KoinX aim to simplify the process.
KoinX is a specialised platform designed to help you calculate and manage crypto taxes, including those associated with ICOs and IDOs.
Here’s how KoinX can be a valuable asset:
- Simplifying Data Import: Manually tracking crypto transactions can be tedious. KoinX allows you to import your transaction data from various exchanges and wallets seamlessly. This stops the need for manual data entry, saving you time and minimising the risk of errors.
- Automated Calculations: Once your data is imported, KoinX employs sophisticated algorithms to automatically calculate your capital gains and losses from ICO/IDO transactions. It eliminates the need for complex calculations and ensures accuracy in your tax reporting.
- Comprehensive Reports: KoinX generates detailed reports outlining your ICO/IDO transactions, capital gains/losses, and overall tax liabilities. These reports can be readily presented to your tax advisor or used for filing purposes.
Are you ready to simplify your ICO/IDO tax calculations? Sign up on the KoinX website today and simplify your ICO and IDO investment journey.
Conclusion
The Indian crypto market is brimming with innovation, and ICOs and IDOs play a crucial role in fueling this growth. However, navigating the tax implications of these fundraising mechanisms requires careful consideration.
Investors are responsible for reporting their capital gains and paying the requisite taxes. Calculating and reporting your correct tax liability is essential to comply with the latest regulations. You can easily use KoinX to generate accurate crypto tax reports and file ITRs.
