Cryptocurrency is a form of digital currency that exists virtually and uses cryptography to secure transactions. At present we have more than 1000 virtual digital currencies such as Bitcoin, Ethereum, Litecoin, etc.
The Government of India has categorized cryptocurrency as virtual digital assets under section 2(47A) of the Income tax act, 1961. Therefore Bitcoin, Ethereum, Litecoin, etc will be considered as virtual digital assets in India.
The taxation of cryptocurrency transactions in India is designed to bring clarity to a previously unregulated space.
Virtual Digital Assets (VDAs) in India refer to digital assets that are created, stored, or transacted electronically. The term has gained prominence in the context of cryptocurrency regulations and taxation.
VDAs encompass a wide range of digital assets, including cryptocurrencies (like Bitcoin, Ethereum), non-fungible tokens (NFTs), and any other assets that are represented in a digital form and have value.
In India, the Income Tax Act has recognized VDAs for tax purposes.
The Finance Act 2022 introduced provisions for taxing income from the transfer of VDAs, establishing specific rules for reporting and taxation.
As per the current regulations, any income from the transfer of VDAs is subject to a tax rate of 30% plus cess.
Additionally, a 1% TDS (Tax Deducted at Source) is applicable on transactions involving VDAs.
Disclosing Virtual Digital Assets (VDAs) in your Income Tax Return (ITR) in India involves a few specific steps.
Determine the nature of your transactions involving VDAs, such as trading, selling, or holding cryptocurrencies and other digital assets to fill up the income tax form correctly.
How are crypto transactions taxed in India?
Income from the transfer of cryptocurrencies and other virtual digital assets (VDAs) is taxed at a rate of 30% under section 115BBH. This applies to both short-term and long-term capital gains. Cost of acquisition will be allowed as deduction while calculating income from cryptocurrency.
Unlike traditional capital gains taxation, no deductions for expenses incurred in acquiring or transferring the asset (like transaction fees) are allowed.
For instance, if an individual realized a gain of 10,000 rupees from selling crypto assets, a 30% tax is levied on this income, resulting in a tax liability of 3,000 rupees plus surcharge, and health and education cess.
Income from the transfer of VDAs is taxed at a rate of 30%, irrespective of the individual’s income tax slab.
Any person who invests in crypto will be required to disclose their income as capital gain from cryptocurrency as it’s held as investment.
If crypto is held for trading purposes, then income will be treated as business income.
Gain from trading, selling or swapping cryptocurrency will be taxed at the rate of 30% plus 4% cess and surcharge irrespective of whether the income is treated as capital gain or business income.
Gifts and airdrops of crypto assets exceeding 50,000 rupees are taxed at a rate of 30%.
Carry forward, set-off of losses from crypto transactions
Losses from the transfer of VDAs cannot be set off against any other income. This means that if you incur losses on one VDA, you cannot use those losses to reduce your tax liability on gains from another source.
Additionally, you cannot carry forward losses to subsequent years for set-off against future gains from VDAs.
Any loss derived from such virtual digital assets cannot be set off against any other income. Losses incurred from one virtual digital currency cannot be set off against income from another digital currency.
TDS on crypto in India
Tax deducted at source (TDS) is a concept where a person who owes a payment to the seller is required to deduct tax at source and forward it to the central government.
Balance amount left out after deduction of tax will be paid to the seller or receiver.
At the end of the quarter, the deductor files a statement in which he credits the tax deducted amount back to the deductee.
With effect from 1st July 2022, tax will be deducted (TDS) at the rate of 1% under section 194S of the Income tax act, 1961, on all sell transactions of virtual digital assets including cryptocurrencies if the transactions exceed Rs 50,000 in a financial year. The limit is Rs 10,000 in certain cases.
This means, tax will not be deducted when you buy cryptocurrency.
Crypto exchanges and platforms should deduct this TDS on all applicable transactions as per our tax laws and deposit the deducted amount with the tax authorities on behalf of the users.
These details can be found on Form 26AS, TDS certificates issued by the deductor and in AIS.
Taxpayers can adjust the TDS amount reflected in form 26AS and/or AIS against the tax liabilities while filing their income tax returns.
As a taxpayer, you can offset this 1% tax deducted against your tax liability calculated at the rate of 30%
How to report cryptocurrency in tax return?
While filing your tax return, you need to make sure that the income/loss is reflected in your Income tax return (ITR) at the right place. It’s also advised to check your AIS before filing your income tax return.
AIS will give you the list of transactions that are reported against your income tax PAN by the deductee or payer. It will also have the list of high value transactions, GST turnover and other details for the whole financial year.
You need to declare your crypto taxes by using either the ITR-2 form or ITR-3 form as applicable to you. These income tax forms include a specific section ‘Schedule VDA’ for reporting crypto gains or income.
Remember, the last date for filing income tax return for the financial year 2023-24 was 31st July 2024.
You can file a belated income return by 31st December, 2024. If the government extended the due date of filing, then the extended date will be considered as the due date of filing income tax return.
For the financial year 2024-25, the income tax filing due date is 31st July 2025. You can now file a belated return by paying late fee up to 31st December 2025.
Where to declare Income from crypto currency transactions?
All income from crypto transactions must be disclosed in your Income Tax Return (ITR). This includes details of the transactions, such as purchase price, sale price, and dates of transactions.
In the income tax return form, we have a separate section for declaring virtual digital assets (VDA). This section should be filled up for reporting your gains from all Virtual Digital Assets (VDA).
If you have made profits from trading VDAs, disclose it under “Income from Other Sources”, if it’s speculative income, or under “Profit and Loss” if it’s non-speculative business income.
If you sold any VDA, report the capital gains (short-term or long-term) in the appropriate section as short-term capital gains (STCG) if the holding period is less than 36 months and long-term capital gains (LTCG) if you held it for more than 36 months.
Calculate your capital gains based on the sale price minus the purchase price.
In your income tax return, you may need to provide details such as:
- The type of VDA.
- Date of acquisition.
- Date of sale.
- Purchase and sale prices.
Keep detailed records of all transactions, including receipts and transaction history, as the tax authorities may ask for documentation.
The income from cryptocurrency transactions is generally considered as “income from other sources” unless the taxpayer is engaged in the business of trading cryptocurrencies, in which case it might be treated as business income.
If you engage in cryptocurrency transactions with international exchanges, the same taxation rules apply, but you must consider any foreign exchange implications.
Tax regulations regarding VDAs can change, so keep an eye on updates from the Income Tax Department regarding reporting requirements.
Disclosing VDAs in your Income Tax Return (ITR) requires careful documentation and accurate reporting of your income and gains.
It’s important for individuals engaging in crypto trading to maintain accurate records of their transactions.
If you have complex transactions or significant holdings, consider consulting a tax professional to ensure compliance and optimize your tax liability.
Frequently asked questions (FAQs)
What is Cryptocurrency?
Cryptocurrency is a digital or virtual form of currency that uses cryptography for security. It operates on decentralized technology, typically blockchain, which is a distributed ledger that records all transactions across a network of computers.
Cryptocurrencies are designed to be secure, transparent, and resistant to fraud, and they can be used for various purposes, including online purchases, investments, and remittances.
In India, some of the most popular cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Litecoin (LTC) and Cardano (ADA).
In India cryptocurrency is falling under the definition of virtual digital asset.
The term “virtual digital asset” refers to any information or code or number or token generated through cryptographic means or otherwise, and includes non-fungible tokens (NFTs), cryptocurrencies, and any other digital assets as may be notified by the government.
Which crypto transactions are taxed in India?
Here is a list of crypto transactions that are subjected to tax in India:
- Purchasing goods and services by using crypto.
- Exchange of crypto with other currencies.
- Trading in cryptocurrencies.
- Receiving payments in cryptocurrency.
- Gift received in crypto.
- Crypto currency mining.
- Getting salary in crypto.
- Receiving airdrops.
What is airdrop and how is it taxed in India?
In the context of Cryptocurrency, airdrop refers to a method used by blockchain projects to distribute free tokens or coins to holders of a specific cryptocurrency.
It often serves as a marketing strategy to promote a new project or to reward loyal users.
Receiving tokens through an airdrop is considered a taxable event.
The fair market value of the tokens at the time of receipt is typically treated as income under the head income from other sources.
When you sell the airdropped tokens, the profit made will be subject to capital gains tax.
In India, as a virtual digital asset, Airdrops are taxed at 30%.
It’s crucial to keep records of the fair market value of the tokens when you receive them and when you sell them for accurate tax reporting.
Which ITR form to be filed for reporting crypto transactions?
Use the appropriate income tax return form based on your income sources.
You will be required to declare your cryptocurrency transactions using either the ITR-2, if reporting as capital gains, or ITR-3, if reporting as a business income.
ITR-2 and ITR-3 forms include a specific section ‘Schedule VDA’ for reporting cryptocurrency gains or income.
You can not file ITR-1 and ITR-4 if you have income from crypto transactions.
How to avoid tax in Crypto?
We don’t think there is any way to avoid tax on crypto transactions in India.
You can check your AIS to see the details of crypto transactions that are reported by exchanges.
It’s advised to report your crypto income in your ITR and pay tax as applicable.
Maintain detailed records of all transactions, including dates, amounts, and values at the time of transactions. This will help you calculate your gains or losses accurately.
