A Complete Guide On Income Tax On Cryptocurrency India 2023

Income Tax on Cryptocurrency in India-Cover

The Finance Bill 2022 has created yet another buzz in the ever-volatile Cryptocurrency Industry. The Indian Government has taken a clear stand on the chargeability of Income Tax on Cryptocurrency gains which earlier was falling in the grey area. There are certain clarifications on the chargeability of GST on Cryptocurrency transactions too.

Let’s break this down with details in this article about Income Tax on Cryptocurrency in India.

Introduction 

Cryptocurrency has come a long way since its humble beginnings in 2008. The splash it has made in the world is, undoubtedly, a significant one. Whereas Bitcoin was the only cryptocurrency for several years, thousands of types are now available. Dogecoin, Ethereum, Litecoin, and many, many more.

You can buy your first Cryptocurrency from any of the below Centralized Exchanges:

Historically, Cryptocurrency has helped people earn a large amount of money. It’s no surprise to see people’s widespread interest in the field. Everyone wants to get into this market and become the next so-called ‘crypto millionaire‘. However, things are not as simple as they appear.

Like other goods and services, Cryptocurrency has taxes applied to them. These taxes vary from country to country. Some countries charge greater taxes, some less.

India, too, has its regulations for income tax on cryptocurrency. Similarly, the Indian Government has iterated regulations for GST on Cryptocurrency clearly. For any Indian planning to enter the market, it is important to understand and be well aware of the taxes on crypto in India.

Let’s look at these cryptocurrencies and their taxability in India.

What are Cryptocurrencies?

Before we learn more about the taxes on cryptocurrency in India, let’s go through a quick revision of what cryptocurrency is. If you want to understand more about Cryptocurrencies you can visit our exhaustive article here.

Cryptocurrency is a type of virtual or digital currency. Cryptos are immune to such interference, unlike regular currencies under government jurisdiction. Instead, they are based on blockchain technology. Various computers and their respective users share this network. Cryptocurrency does not subscribe to centralization. 

Cryptocurrencies use ‘Mining’ or ‘Staking’ (in fact there are other proofs of consensus that cryptocurrencies as well) to add more Cryptocurrencies into the system. Mining is a very resource and energy-intensive process. However, staking is not.

Suggested Reading: Different Proofs or consensus Mechanisms

They also allow for safe transactions and can buy and sell goods and services. People can make considerable money in this market. It explains why many choose to invest in crypto. 

Status of Cryptocurrency in India

Cryptocurrency has seen great growth in India. At present, India has the largest number of crypto owners in the whole world: about 15 million users. India’s booming population plays no little part in this. Nonetheless, a very impressive feat.

While crypto investment in India was about $923 million in April 2020, by November 2021, we had reached an investment of $10 billion. Furthermore, many Indian cryptocurrency investors belong to large organizations. This presently accounts for the two crypto unicorns and over 350 crypto start-ups in India.

India is still on the fence regarding cryptocurrency. Cryptocurrency’s decentralized nature means it does not come under the Indian Government or the Reserve Bank of India’s jurisdiction. In the Budget 2022, the government has given cryptocurrencies and NFTs (Non-Fungible Tokens) the status of Virtual Digital Assets that is VDA.

In 2018, the Reserve Bank of India attempted to ban financial institutions and banks from facilitating cryptocurrency transactions. You can read more about the legality of Cryptocurrencies in India here.

The Honorable Supreme Court overturned this decision sometime in 2020. The virtual exchanges’ fundamental rights and constitutional grounds would not allow this ban to come into place. Despite this, its legal status remained unclear. 

The lack of any regulations, rules, and other guidelines makes it difficult to resolve cryptocurrency disputes if and when they arise. These transactions carry great risk. Before you go through with them, think about your decision carefully. 

Despite this, the use of cryptocurrency continues to grow exponentially in India. It matters not whether crypto is classified as a currency or an asset. Any gains one receives from crypto transactions will incur taxes. Investors who profit, in any way, from selling cryptocurrency are liable to pay appropriate income tax.

Taxability of cryptocurrencies in India

I am purposely mentioning about Pre 2022 Budget period here to iterate the phase-shift in the Indian Government’s thought process with respect to Income Tax on Cryptocurrency. You can directly jump to Post 2022 Budget stand below if you like to.

Pre Budget 2022 Scenario

Gains from cryptocurrency transactions followed standard income tax rules. These gains were classified into two broad categories:

  • Business Income
  • Capital Gains

What category the particular transaction falls in depends on the nature of the transaction and the investor’s intention.

Business Income Trades: When investors enter into a high volume and frequent trades. On the other hand, if the trades conducted are few and the main intention of owning them is to profit from long-term appreciation, they will be classified as ‘capital gains.

It is best to take the assistance of an expert to determine the classification of your transactions and accurate reporting of the same.

Let’s take a closer look at these classifications and the taxes on crypto in India applied to each category. 

When classified as Business Income

Crypto transactions classified as business income imply the Goods and Services Tax (GST). Profits gained from selling goods will have direct and indirect expenses deducted from them. According to income tax slabs, the remaining profits are added to your other taxes and incomes. Adjustment of expenses was allowed while calculating the tax on profits received from Cryptocurrency.

The GST angle when classified as Business Income

The Goods and Services Tax (GST) is a tax that is applicable on the supply of goods and services. Goods cover many different products, while services are everything other than these goods.

Buying and selling cryptocurrencies is another form of this supply and clearly falls under the definition of ‘Supply’ (Section 7(1) of CGST Act, 2017). Thus, there will be GST on Cryptocurrency as well.

The Central Economic Intelligence Bureau (CEIB) proposed to categorize cryptocurrencies as intangible assets. All crypto transactions that you make will carry GST charges.

The government still had to clarify whether the GST paid will be considered as a mode of settlement or sale of VDA. It was still not clear whether the buyer would pay taxes separately considering it as the transfer of VDA. Also, the seller will have to deduct TDS on the payment received by selling the VDA.

When classified as Capital Gains

Crypto-transactions are another form of investment. Capital gains and capital losses are two categories these transactions can be classified into. Capital gains occur when the selling value of the transaction is greater than the cost, while capital losses occur when the cost is higher than the sale.

Crypto assets held for a period of fewer than three years (36 months), were charged with short-term capital gains tax at an individual slab rate. Crypto assets sold after three years (36 months) were charged 20% tax with indexation benefit and treated as long-term investments.

The capital gains from VDA were not set off with other losses or income. It was calculated separately.

When classified as Capital Losses

The income tax authorities had decided that capital losses from VDA transfers cannot be set off with other gains or income. Also, any losses from VDA investment was not allowed to carry forward in the next financial year.

When classified as Other Income Sources

It is also possible to report crypto-assets as ‘income from other sources ‘ when filing their ITR. The individual’s total income was to include the income from crypto-assets. According to the tax slab of the taxpayer, the government would charge the relevant applicable taxes. 

Some contest that income from crypto-assets should be classified as ‘speculation business income’. According to the highest tax slab, taxes will be charged. We then advised people to classify the income they gain from crypto-transactions as business income or capital gains.

Budget 2022’s verdict on the taxability of cryptocurrencies in India

Besides the general guidelines, the last few budgets have shed more light on the taxes on crypto in India.

On February 1, 2022, Finance Minister Nirmala Sitharaman announced a 30% tax on the profits earned on digital assets such as cryptocurrency and Non-fungible Tokens (NFTs). This will come into effect starting from April 1, 2022. While taxation on these assets does not legitimize them. This newfound clarity on cryptocurrency might be the first step needed toward proper regulation.

Suggested Reading: Legality of Cryptocurrencies in India.

Moreover, there is no set off or carry forward of losses allowed.

The government of India has classified cryptocurrencies and NFTs under VDA. VDA stands for Virtual Digital Assets and, according to the government, investors should not mistake it as the legal currency of the country. This also includes any digital currency or assets that cryptographic codes define or control.

The Indian Government has given a clear indication of the introduction of Digital Rupee

The basic exemption limit of Rs.2,50,000 on income is not applicable in the transfers and profits earned through cryptocurrencies and NFTs. Moreover, the new rule won’t merge the losses in case of VDA transfers with other income or shall allow to carry it to the next financial year.

TDS on Cryptocurrency Transactions

Finally, digital assets transfers that exceed Rs.10,000, will attract a 1% TDS (tax deducted on the source). These provisions will be applicable from 1st July 2022. All crypto exchange platforms will deduct the required taxes as per the new bill.

Income Tax on Cryptocurrency in case of GIFTS

Moreover, the government has also come up with taxes slab for gifting Virtual Digital Assets. In the case of crypto gifting the taxes will be borne by the recipient. Taxes on the gifting of cryptocurrencies and NFTs are applicable if its worth more than Rs.50,000.  However, under the tax law, these taxes are not applicable if relatives exchange the VDAs as gifts.

GST on Cryptocurrency in India

Provisions from Budget 2022 about GST on Cryptocurrency in India are as follows,

Centre will take a proposal to GST Council to levy 18% GST:

  • On commission charged by Cryptocurrency Exchanges.
  • Reverse Charge on commission charged by Foreign Cryptocurrency Exchanges as the place of supply of services is India. In short, burden of payment of GST is on the investor if he pays commission to a Foreign Cryptocurrency Exchange
  • Mining of Cryptocurrecies are now under the purview of GST as these are considered as value addition by investors.

Reporting of Cryptocurrency gains by Corporate Entities

In the case of Companies investing in Cryptocurrency, The Ministry of Corporate Affairs (MCA) mandatorily requires you to report your losses and gains in cryptocurrency. The value of the crypto on the balance sheet date must be reported. This mandate has been put forward to regulate crypto use amongst companies. However, all individuals must engage in reporting and paying taxes on their cryptocurrency gains. 

Impact of Budget 2022 on Investment flowing into Cryptocurrencies

Every Budget is made to benefit the economy in the long term. It also shows the ideology of the Government towards different assets or income or even its own revenue.

As far as the impact of this Budget on Cryptocurrencies is concerned, following is our observation, it will:

  1. Lower the investment in cryptocurrency by individuals.
  2. Increase the revenue of Government
  3. Lower the volume of Crypto Transactions
  4. Result in less speculation as most people will invest for long term
  5. It is better for investors, atleast Government has given some clarity on the Income-tax on cryptocurrency.
  6. May force people actively involved in Cryptocurrency market to leave India.
  7. Due to the high tax that is imposed, people may shift to mutual funds as the tax on mutual fund gains is lower
  8. It is still not clear if Cryptocurrency is legal in India
  9. Government’s viewpoint of considering Cryptocurrency gains as speculative income is not a welcome step for long term investing
  10. It is still not a legal tender.

Future of cryptocurrency in India

The 30% taxation has received a mixed response from the masses. Many feel the 30% rate is extremely high, and old investors may be dissuaded from further crypto investment. The categorization is similar to Income taxes on Speculative Transactions.

On the other hand, new investors who are very serious about crypto will experience newfound confidence, and the added clarity will encourage them to finally dabble into the market.

This move by the Government was one to stop all speculation and discourage trading by retail investors. According to them, trading in cryptocurrency is quite similar to gambling (speculative income).

Others have protested against this claim. Compared to gambling, trading crypto requires a set of specific skills not everyone possesses. There were discussions around how the government carries forward the investors’ inequities and the losses they incur. Unfortunately, crypto doesn’t get the same treatment.

Conclusion

While it is unclear if cryptocurrency transactions will ever acquire legal status in India, taxes are unavoidable. Capital gains or business income from investing in cryptocurrency will attract appropriate taxes. This goes for all income earned before April 1, 2022.

Those planning to invest in cryptocurrency post-April 1, 2022 must keep the taxability of cryptocurrency in India in mind. Transferring all digital assets will incur a 30% taxation

For this reason, you must keep a record of all the transactions you make via cryptocurrencies. We also believe a taxation expert’s assistance will ensure you do not make any mistakes.

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