Airdrops! Those exciting little care packages of free crypto that land in your wallet. But hold on a minute. Before you go on a digital spending spree, there’s a crucial question: How are airdrops taxed in India?
Airdrops are promotional events where new crypto projects distribute their tokens (like free samples!) directly to crypto wallet addresses.
The Indian government has set its sights on crypto, and airdrops are no exception. This blog will explain everything you need to know about airdrop taxation in India. We’ll cover the tax rates when you must pay them and any exemptions you qualify for.
So, buckle up, crypto enthusiasts, and let’s navigate the sometimes murky waters of Indian crypto tax together!
Read More: Crypto Tax Guide India
How Are Crypto Airdrops Taxable In India?
Gaining an airdrop token for free or with little effort can be rewarding, but it is crucial to understand the tax implications. Airdrops have tax implications similar to those of crypto gifts in India. So let’s dive into the details of the same:
Income Tax On Crypto Airdrops
In India, airdropped tokens are classified as “income from other sources” (IFOS) and are subject to income tax. The tax rate is based on the individual slab, depending on the tax regime. This tax is levied on the tokens’ fair market value (FMV) when you receive them. Here’s the key takeaway: even though you didn’t pay for the tokens, they are still considered income for tax purposes.
Capital Gains Tax On Disposal Of Airdrops
A capital gains tax is applied to the profit an investor enjoys from selling their investment, such as cryptocurrency, NFTs, or stocks. Hence, if you decide to sell, swap, or spend your airdropped tokens later, your capital gains will be subject to a flat tax rate of 30%. This Capital Gains tax applies to the difference between the FMV on the sale date and the FMV on the date you received the airdrop (which you already paid tax on). In addition to this, you are liable to pay a 4% health and education cess on the CGT value.
Please note that this is only applicable if you enjoy a profit from the sale of the token. However, losses experienced from the sale of tokens cannot be offset.
Tax Deducted At Source (TDS) On Disposal Of Airdrops
Apart from the CGT, a 1% Tax Deducted at Source (TDS) applies to all crypto transfers, including airdrops, exceeding INR 50,000 (or INR 10,000 in some instances) within a financial year. The exchange or platform buying the airdrop deducts this TDS.
TDS is just a withholding tax, and you might need to pay additional tax during filing if the total tax liability exceeds the TDS deducted. However, if you don’t have any tax liability at the end of the financial year, you can claim back the TDS amount.
Applicable Income Tax Clauses
The Indian Finance Department incorporated specific tax clauses into existing tax regulations to regulate the use of cryptocurrency in the country. Here’s a list of tax clauses applicable to crypto mining income.
Rule 11UA: Determining Fair Market Value (FMV)
Rule 11UA lists guidelines for calculating newly issued crypto coins’ Fair Market Value (FMV). If the price for these coins exceeds their FMV, they are subject to income tax categorised as ‘Income from other sources’.
Section 115BBH: Taxation on Crypto Profits
Section 115BBH imposes a flat 30% tax plus cess (currently 4%) on any profits generated from the sale of cryptocurrencies or virtual digital assets (VDAs). Individuals and businesses are subject to this tax. They cannot enjoy deductions except for acquisition costs, which cannot be offset against other income.
Section 194S: TDS on VDA Transfers
Introduced in the 2022 Union Budget, Section 194S of the Income Tax Act, 1961, aims to enhance transparency and tax compliance concerning virtual digital assets (VDAs), including cryptocurrencies and NFTs. This section mandates a 1% tax deduction at source (TDS) on VDA transfers, applicable when the transaction value exceeds specific thresholds.
Under Section 194S, a TDS obligation arises when the payment for transferring a VDA exceeds INR 50,000 for specified persons and INR 10,000 for others within the financial year.
A specified person is defined as:
- An individual or Hindu undivided family (HUF) without income from business or profession.
- An individual or HUF with a business income of up to INR 1 crore.
- An individual or HUF with professional receipts of up to INR 50 lakh.
Tax-Free Events In Case Of Airdrops
You may not have to pay taxes on the airdrop tokens in certain situations. These cases are explained below:
The Fair Market Value Of The Airdrop Token Is Zero
If the airdropped token has no established market value when you receive it, the Indian tax authority might consider it valueless for tax purposes. However, it’s essential to stay updated as the token’s value could fluctuate. If it gains value later, you might be liable for capital gains tax when you sell it.
Value Of Airdrop & Crypto Gifts Received Is Less Than INR 50,000
The Indian government offers an exemption for gifts up to INR 50,000 per financial year, which applies to crypto gifts. So, if the total value of all the airdrops and crypto gifts you receive in a year falls under INR 50,000, you don’t have to pay any taxes. However, if the value of (gifts + airdrops) touches anything above INR 50,000, you must pay income tax on the entire amount.
How Do You Calculate Airdrop Taxes?
Now that you have understood the details of how taxes on airdrops function in India, it is time to describe the steps to calculate the same:
Calculate Your Income Tax From Airdrop:
To navigate the complexities of cryptocurrency taxation, you need a clear understanding of how to calculate your taxable income from airdrops. It starts with establishing the airdropped tokens’ Fair Market Value (FMV).
You receive an Arbitrum token through an airdrop during the financial year. At the time of receipt, its FMV is INR 2,000. Remember to include this value in your Income Tax Return (ITR). It’s essential for reporting under “Income From Other Sources.” Subsequently, you’re required to pay taxes based on your applicable tax rate.
Calculate Your Capital Gains Tax
When you sell a token you previously received through an airdrop, your potential profit becomes subject to capital gains tax (CGT). This tax applies to the difference between the token’s fair market value (FMV) when you received it and its FMV at the time of sale. The process involves calculating your cost basis, representing the token’s initial value when it enters your possession.
Capital Gains = FMV of the token at the time of Sale – Cost of the token
For example, if you received a token through an airdrop when its FMV was INR 2000 and later sold it when the FMV had increased to INR 3000, your taxable gain would be INR 1000 (INR 3000 – INR 2000). You must report and pay taxes on this gain at a flat tax rate of 30% plus a 4% cess (allocated for health and education).
Additionally, if the sale value is above INR 50,000 or (INR 10,000 in some cases), the buyer will deduct a 1% TDS on the transaction.
Real-Life Scenario
Rahul, a young professional, discovered that he had been airdropped 100 tokens of a newly launched cryptocurrency called “EtherSprint.”
Rahul held onto his airdropped tokens for some time, hoping their value would be appreciated. Here’s how he will be taxed.
Income Tax on Crypto Airdrops
The fair market value (FMV) of the EtherSprint tokens at the time of the airdrop was INR 50 per token. Rahul’s taxable income increased by INR 5,000 (100 tokens * INR 50), which he needs to describe as IFOS.
Capital Gains Tax on Disposal of Airdrops
Several months later, the value of EtherSprint tokens surged, and Rahul decided to sell his tokens when their FMV reached INR 100 per token. Hence, the total sale value is INR 10,000.
Since Rahul received the tokens at no cost, his capital gains would be calculated based on the difference between the FMV on the sale date, INR 100 per token, and the FMV on the date of the airdrop, INR 50 per token.
Capital Gains = [10,000 – 5,000] = INR 5,000
Therefore, Rahul’s capital gains amounted to INR 5,000.
Applying the flat capital gains tax rate of 30%, Rahul’s tax liability on the capital gains from the sale of EtherSprint tokens would be INR 1,500. Additionally, he would need to pay a 4% health and education cess on the capital gains tax, amounting to INR 60. Hence, his total CGT stands at INR 1560.
Read More: Crypto Taxes in India
KoinX In Action
Free crypto received as Airdrops can be exciting! However, tax headaches are less, especially when dealing with multiple transactions and fluctuating crypto values. That’s where KoinX comes in as your crypto tax hero! It is a crypto tax calculating platform that helps you generate accurate crypto tax reports in minutes.
Here’s how it can take the stress out of calculating your airdrop taxes:
Tracks Airdrop Data: Say goodbye to manual record-keeping. KoinX integrates with popular crypto exchanges and wallets, automatically tracking your airdrop history. No more scrambling to remember the date and value of each airdrop.
Fair Market Value Magic: Finding the FMV of your airdropped tokens can be time-consuming. KoinX uses real-time market data to determine the FMV on the day you receive the tokens, saving you valuable time and effort.
Calculates Your Income: Once KoinX has all the airdrop details, your income will be calculated based on the FMV. This gives you a clear picture of how much you might owe in taxes.
Generates Tax Reports: Tax season doesn’t have to be a nightmare. KoinX generates comprehensive tax reports that include your airdrop income, making filing your taxes a breeze.
KoinX is your one-stop shop for simplifying crypto tax calculations, especially for airdrops. Hence, let us handle the complex stuff so you can focus on the exciting crypto world! Join KoinX today and enjoy receiving airdrops.
Conclusion
Airdrops can be tempting to expand your crypto portfolio but remember, the Indian tax authorities are watching. While airdrops with zero FMV or those falling under the INR 50,000 annual gift exemption might escape taxation, the value of airdrops with more than INR 50,000 is taxable. It will be added as IFOS in the ITR. Moreover, any gain enjoyed from the sale of the airdrop token will be liable to a CGT of 30% and a 4% cess.
Calculating these taxes manually can be hectic. Hence, you must use KoinX to make your crypto taxes easier. It is an automated platform that generates crypto tax reports based on the type of crypto transaction incurred.
