Taxation on Cryptocurrencies in India

Definition of cryptocurrency in India

In her 2022-23 budget speech, Finance Minister Nirmala Sitharaman has defined Cryptocurrencies and other assets with similar nature as “Virtual Digital Asset”. As per Section 2(47A), Virtual Digital Asset means-

(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;

(b) a non-fungible token or any other token of similar nature, by whatever name called;

(c) any other digital asset, as the central government may, by notification in the official Gazette specify: Provided that the Central government may, by notification in the official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.

Rule of Taxation on cryptocurrencies in India

(1) 30% Tax on Profits from Trading, Selling, or Spending Crypto: This means that if you make a profit from activities involving cryptocurrencies such as trading, selling, or using them to purchase goods and services, you are liable to pay a tax of 30% on the profits you earn. For example, if you bought Bitcoin at INR 1,00,000 and then sold it for INR 1,50,000, you would be required to pay tax on the INR 50,000 profit at a rate of 30%.

(2) 1% TDS Tax on the Sale of Crypto Assets Exceeding More Than RS 50,000 (RS 10,000 in Certain Cases) in a Single Financial Year:-

i) TDS stands for ‘Tax Deducted at Source’. This means that when you sell cryptocurrency assets worth more than INR 50,000 in a single financial year, 1% of the total sale value will be deducted as tax at the source of the transaction.

ii) There is a lower threshold of INR 10,000 in certain cases.

(3) Income Tax Upon Receipt at Your Individual Tax Rate if You’re Earning Other Income in Crypto:

i) If you earn income through activities involving cryptocurrencies, such as mining, staking, or receiving payments in cryptocurrency, this income is subject to income tax at your individual tax rate.

ii) The income tax rate will vary based on your total income from all sources, including your crypto-related income. India has a progressive tax system, so the rate can range from 5% to 30% or more, depending on your income bracket.

Some Cryptocurrencies in India that are exempt from taxation

In India, not every crypto transaction attracts taxation.

i) When you transfer cryptocurrencies between your own wallets or simply hold crypto assets, there are no tax implications.

ii) Receiving crypto as a gift from close family members or from friends and relatives, as long as the gift amount remains under INR 50,000, is also exempt from taxation.

iii) These provisions offer some tax relief for individuals engaged in crypto activities and aim to encourage cryptocurrency adoption while maintaining clarity on tax obligations. However, it’s crucial to stay updated with tax regulations, as they can change over time, and consulting with a tax expert is advisable to ensure compliance with Indian tax laws.

Taxation Rules for Crypto Mining in India?

When it comes to crypto mining in India, taxation can be complex. First, you are subject to Income Tax based on the fair market value of the mined coins in INR at the time you receive them. Furthermore, if you decide to sell, exchange, or use the mined coins, any resulting profits are liable for a 30% tax. However, the lack of clear guidelines from the Income Tax Department (ITD) makes it essential to seek professional advice. Advince has team of experienced tax professionals who can be reached out for it. To navigate the potential tax implications of crypto mining activities, it is highly advisable to consult with an experienced accountant who can provide accurate guidance in compliance with the ever-evolving tax regulations in the country. This ensures that you fulfill your tax obligations while optimizing your financial strategy in the world of cryptocurrency mining.

Taxation Rules for Crypto Staking in India

The Income Tax Department (ITD) in India has not yet issued specific guidelines regarding the taxation of staking rewards in the cryptocurrency space. However, it’s expected that if you’re participating in staking within a Proof of Stake (PoS) consensus mechanism, you’ll likely be subject to Income Tax at your individual tax rate upon receiving staking rewards. This tax calculation would be based on the fair market value of the received tokens in INR on the day you receive them. Moreover, when you eventually sell, swap, or utilize these staking rewards, any resulting profits are liable for a 30% tax. Given the absence of clear directives from the ITD in this regard, it is strongly recommended to consult with a knowledgeable tax advisor or accountant.

Taxation in developed countries on Cryptocurrencies

United States: In the United States, buying and selling cryptocurrency is taxable because the IRS categorizes cryptocurrency as property rather than currency. It levies a tax between 0% and 37%.

Australia: In Australia, holding cryptocurrency for more than 12 months allows for a 50% reduction in capital gains tax (CGT). CGT applies when individuals sell, gift, trade, exchange, or use cryptocurrency for purchases or services.

United Kingdom: The capital gains tax rates applicable for selling any cryptos or digital coins in Great Britain are:

i)For higher and additional rate taxpayers – 20%

ii)For basic rate taxpayers – 10%

The capital gains tax impact in Australia varies based on factors such as the gain’s size, allowable deductions, and your total taxable income. Generally, a 20% tax applies to gains exceeding the basic tax rate threshold.

Italy: In Italy, you are only required to pay taxes on the portion of your cryptocurrency gains realized from sales exceeding $58,232 (or the equivalent of €51,645, which was previously 100 million lire).

Netherland: In the Netherlands, individual income is subject to varying taxation methods and rates depending on the income source. Notably, cryptocurrency is taxed at a rate of 31% in this country.

Germany: In Germany, cryptocurrencies are viewed not as capital assets but as private money. If you hold your cryptocurrency for more than a year before swapping, spending, or selling it, you are exempt from taxation. However, if you hold it for less than a year, you’ll be taxed unless your profits fall below €600. This tax policy aims to incentivize long-term cryptocurrency holding while imposing minimal tax burdens on smaller gains.

Canada: In Canada, cryptocurrency is classified as a digital asset, and tax is applicable when it’s sold. Holding or purchasing crypto is tax-free. When individuals earn capital gains by disposing of crypto, they must report it as part of their annual income. However, only 50% of the capital gain is subject to taxation, not the entire gain. This approach aims to provide some tax relief for crypto investors while ensuring compliance with tax regulations.

Role of GST on Cryptocurrency in India

The application of the Goods and Services Tax (GST) to cryptocurrencies in India remains unclear as the government has not provided specific guidelines or definitions regarding Virtual Digital Assets (VDAs) under the GST Act. Currently, the GST Act does not include provisions that explicitly mention or define VDAs, leading to ambiguity regarding their tax treatment. According to GST regulations, it is typically the responsibility of the supplier of goods or services to levy and collect GST. Given the evolving nature of the cryptocurrency market and its increasing popularity in India, major Indian cryptocurrency exchanges are actively seeking clarification from authorities about whether GST should be applicable to crypto assets. This effort is aimed at addressing the uncertainty surrounding the taxation of cryptocurrencies and ensuring compliance with tax regulations in the country.

How to minimize Cryptocurrency Taxes

i) To minimize crypto tax obligations, consider indirect exposure to cryptocurrency through platforms enabling Indian investors to participate without directly buying or holding crypto, reducing tax liability.

ii) Opt for long-term investment strategies by holding cryptocurrencies for over a year before selling or using them. This approach generally results in lower tax rates compared to short-term gains, offering potential tax savings.

iii) Explore tax-efficient investment vehicles, such as tax-advantaged accounts or trusts, which can provide additional opportunities for reducing your overall tax liability while participating in the crypto market.

Recent developments concerning Cryptocurrency Taxation in India

The Indian Government and the Income Tax Department (ITD) have been actively providing extensive guidance regarding cryptocurrencies and the potential tax consequences of your crypto investments:

i) Investors must report their earnings from cryptocurrency and other virtual digital assets as capital gains if they are held for investment purposes or as business income if held for trading. If you have business income from cryptocurrencies, it’s essential to use the ITR-3 form for tax filings, rather than the ITR-2 form. This distinction ensures accurate tax reporting based on the nature of your crypto holdings and activities.

ii) In the Income Tax Return for the fiscal year 2022-2023, there is now a specialized segment called the “Schedule Virtual Digital Assets” specifically designed for reporting gains derived from cryptocurrencies and other Virtual Digital Assets (VDAs).

iii) Penalties have been implemented under sections 271C and 276B for instances where TDS is not deducted or is not deposited as required by tax regulations.