All about Crypto Tax Laws in India

Cryptocurrencies, NFTs, and similar modern financial instruments have become increasingly popular in recent years, as a decentralized and secure way to conduct transactions and store wealth. However, as with any financial asset, cryptocurrency ownership and transactions are subject to taxation in many jurisdictions around the world.

The taxation of these Virtual Digital Assets, as it is called in tax terms, can be complex and challenging for many individuals and businesses, as the rules and regulations surrounding it can vary significantly between countries and can change rapidly.

In this context, it is essential to understand the tax implications of owning, trading, and using cryptocurrencies to comply with the relevant regulations and avoid penalties or legal consequences. This requires a thorough understanding of the tax laws and regulations specific to cryptocurrencies, as well as the tools and strategies available to minimize the tax burden.

In this blog, you will get to know about the coverage of cryptocurrency and other similar assets in the Indian taxation laws, how taxes would be charged, what would be the tax rates, etc.

MEANING OF VIRTUAL DIGITAL ASSET

Firstly, a new clause has been added in Section 2 of the Income Tax Act via the Finance Act 2022 passed last year defining the term ‘Virtual Digital Asset’ As per the definition of Sec 2(47A),-

1. 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;

2. A non-fungible token or any other token of similar nature, by whatever name called;

3. Any other digital asset, as the Central Government may, by notification in the Official Gazette specify.”

So, through this wide definition of Virtual Digital Assets (VDAs), the Government has covered cryptocurrencies, NFTs, crypto tokens, and all similar assets which share some common traits.

MEANING OF TRANSFER

Now, we know VDAs are assets, the income tax would be charged on transfer of the assets. We know the definition of Transfer as per the Income Tax provisions. The definition is –

“transfer, in case of capital assets, includes, -

a. the sale, exchange, or relinquishment of the asset; or

b. the extinguishment of any rights therein; or

c. the compulsory acquisition thereof under any law; or

d. in a case where the asset is converted by the owner thereof into, or is treated by him, as stock in trade, of the business carried on by him, such conversion or treatment

e. the maturity or redemption of a zero-coupon bond;

f. any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; or

g. any transaction which has the effect of transferring, or enabling the enjoyment of, any immovable property.

The above definition is same for transfer of all types of capital assets including VDAs. So, how would we apply the transfer definition over the practical cases of crypto sales and holdings. We will understand this via examples.

1. Mr. Satoshi sold his BTC via WazirX and get consideration in INR.

It will be covered under point (a) of transfer. Hence, it is considered as transfer.

2. Mr. Satoshi sold his BTC via WazirX and get consideration into ETH.

This will also be covered under point (a) of transfer. The selling of BTC would be called transfer of BTC. And in future, when ETH would be sold against Fiat currency like INR, it would be called transfer of ETH.

3. Mr Satoshi transferred his BTC from one of his crypto wallets to another.

As the owner has not changed, it would not be considered as transfer. It is similar to transferring your bank balances from one bank account to another bank account.

4. Mr Satoshi is buying land and paying in BTC.

As the Government is considering the cryptocurrency as assets and not currency, fundamentally, this transaction will be considered as exchange of one asset against other. Hence, it will be covered in point (a) of transfer definition.

5. Mr Satoshi is transferring his crypto holdings from One crypto exchange to another.

This is also a case of transfer where the holdings has not changed its hand. Hence, this is also not considered as transfer.

6. Mr Satoshi sold USDT, the stable coins for USD, against USD via a crypto exchange.

This will be considered as transfer as the government has not differentiated the stable coins from other coins/tokens.

After determining whether the sale would be considered as transfer or not, the next big question for a person would be the calculation of gain and the tax rate applicable.

CALCULATION OF CAPITAL GAIN

Sec 115BBH has been introduced by Finance Act 2022. This Section talks about 4 concepts:

a. Tax rate Applicable for VDAs: The income-tax calculated on the income from transfer of VDA would be 30%. One doubt that may rise in your minds could be whether the basic exemption limit allowed to be exhausted against the Income from VDAs or not?

For instance, an assessee has following income – Income from Salary ₹1,80,000 and Income from sale of Cryptocurrencies ₹2,00,000. What would be the taxable income?

Section 115BBH states that income first shall be divided into two parts. First part would be the income from transfer of VDA; and second all other income. Now, tax would be calculated @ 30% on first part and on the second part, separate tax would be calculated assuming that the assessee has income from second part only.

So, tax on ₹2,00,000 @ 30% would be ₹60,000. Tax on ₹1,80,000 would be ‘Nil’. Total tax would be ₹60,000. This clarifies that the basic exemption limit will not be exhausted against the income from transfer of VDA.

b. Deductions allowed while calculating Income: It is mentioned clearly in the provisions that no deduction or expenditure shall be allowed against such Income under any provisions except the cost of acquisition. This means that only cost shall be allowed. No indexation benefits will be given. In case there is no cost of such VDA, then the total sale value shall be considered as Income.

c. Set-Off Allowability: No set-off is allowed against any income computed under any provisions of the Act. However, while computing the income from one VDA, the loss from same VDA would be allowed to be set-off. For instance, an assessee can set-off its loss arising from sale of 100 BTC against income arising from sale of 200 BTC during the previous year. However, he/she cannot set-off loss from ETH against income from BTC.

d. Carrying Forward Allowability: This is strictly disallowed by the Government. Hence, no assessee can carry forward his/her loss of current year arising from the transfer of VDA.

VIRTUAL DIGITAL ASSETS AS GIFTS

What if Virtual Digital Assets are gifted to someone? How will it be taxed?

In one of the Explanation of Section 56 wherein Property has been defined, Finance Act 2022 has included VDAs also in the definition. Hence, VDAs are now taxed on the similar lines how other gifts are taxed. 

Tax rate in case of gifts would not be 30% as this rate applies in case of transfer of VDA and transfer has been specifically defined in Capital Gain chapter. So, at what rate will VDAs gifts taxed? As per Normal Rate.

TAXABILITY OF CRYPTOCURRENCIES MINING

What about the taxability of cryptocurrencies/tokens received while ‘mining’?

If the assessee is a professional miner or is involved in mining business, the income arising from mining would be taxable as income from profession or business as Section 28(iv) says that value of any benefit or perquisite arising from business or profession is taxable under this head whether the same can be convertible into money or not.

For instance, a professional miner solved some algorithmic puzzle and get rewarded with few ETHs. As these ETHs have value arising from profession, it is taxable. Even if it is not convertible into money, the fair market value of the same would be considered while calculating the business income. The income tax rate would be normal rate applicable based on the type of assessee.

TAXABILITY OF AIRDROPS

Airdrops are free coins/tokens received by a person when a cryptocurrency launches or promotes itself. These are freebies basically. Airdrops of cryptocurrencies, NFTs, tokens are gifts in nature, hence are treated as Income from Other Sources. The value would be Fair Market Value of such VDA. The applicable tax rate would be the Standard rates only. 

When these cryptos/tokens/coins, received during airdrops, would be transferred by the assessee in future, it would be called transfer of VDA and the Capital Gain provision will be allowed. The applicable tax rate would be 30%. The Cost of Acquisition would be the Fair Market Value on which the tax has already been paid under Other Sources.

In conclusion, the Indian Government has made an attempt to bring the cryptocurrencies in the purview of the tax laws, with regulations and guidelines, still evolving. However, it is crucial for individuals and businesses dealing with cryptocurrencies to be aware of their tax obligations to avoid legal and financial penalties. Also, it is essential to keep accurate records of all cryptocurrency transactions and report them correctly in tax returns.

Moreover, it is important to seek the guidance of a qualified tax professional who can provide advice on the tax implications of cryptocurrency transactions and help in complying with the relevant regulations.

In summary, while the taxation of cryptocurrencies in India may seem daunting, staying informed, and taking the necessary steps to comply with the rules can help avoid potential legal and financial consequences.

Note: Information in this blog is intended to provide only a general outline of the subjects covered It should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice. Bion Advisors accept no responsibility for loss arising from any action taken or not taken by anyone using this blog.