If you’ve been following the rise in Bitcoin prices and the booming crypto market, you might be wondering how your crypto profits are taxed in India. As cryptocurrency continues to gain popularity, it’s essential to understand how the government treats gains from digital assets like Bitcoin, Ethereum, and Dogecoin.
In this guide, we’ll break down the basics of crypto taxation in India, covering everything from capital gains to airdrops, and even how to report your crypto transactions in your income tax returns.
Understanding Crypto Taxation in India
In India, the taxation rules for virtual digital assets (VDAs), which include cryptocurrencies and NFTs, are different from traditional investments like stocks or mutual funds.
Here’s a breakdown of how the taxation works:
1. Capital Gains Tax on Crypto
The Union Budget 2022-23 introduced a flat 30% tax on crypto profits. This means that any profits you make from selling or transferring Bitcoin, Ethereum, or any other crypto asset are taxed at a flat rate of 30%, no matter how much you earn. It doesn’t depend on your income tax slab, so even if you’re in the lowest tax bracket, your crypto gains will still be taxed at 30%.
2. Tax Deducted at Source (TDS)
A 1% TDS is applied on every crypto transaction when you buy or sell virtual digital assets. This means that 1% of the total transaction amount will be automatically deducted by the exchange and sent to the government. It’s important to keep track of this TDS, as it will be reflected in your Form 26AS (your tax statement), and you can claim it while filing your income tax returns.
3. No Set-Off of Losses
Unlike traditional investments like stocks, where you can offset capital losses from one asset against the gains from another, this is not allowed for cryptocurrencies.
For example, if you make a profit on one Bitcoin but incur a loss on another, you will still have to pay the 30% tax on the profit, even though you lost money on the second one. You cannot carry forward losses to future years either, which makes tax planning important.
4. Internal Transfers Aren’t Taxed
If you move Bitcoin or Ethereum between wallets that you own—say, from your exchange wallet to your private wallet—this is not considered a taxable event. The transfer is seen as an internal move, so no taxes are due. Taxes only apply when the crypto asset changes hands from one party to another (i.e., when you sell it to someone else or exchange it for another asset).
How Are Taxes Calculated on Crypto Transactions?
When it comes to calculating capital gains on crypto, the method recommended by tax experts is FIFO (First In, First Out). Let’s understand how this works:
- Suppose you bought one Ethereum coin on January 1, 2024, and then bought two more on November 1, 2024.
- If you decide to sell two Ethereum coins on November 12, 2024, the FIFO method says you’ll be selling the first Ethereum coin you bought on January 1 and one of the coins you bought on November 1.
This method is used for all crypto transactions, including buying, selling, or swapping one crypto asset for another. It helps determine how much gain or loss you’ve made on each transaction, which will then be taxed accordingly.
Taxes on Airdrops and NFTs
If you receive crypto assets through an airdrop (free distribution of tokens), these are taxed at 30% on the day you receive them, based on their fair market value in Indian Rupees. Later, if you sell, swap, or use these tokens, any gain you make from the sale will also be taxed at 30%.
For NFTs (non-fungible tokens), the same rule applies. If you make a profit from selling an NFT, the income will be taxed at 30%. The only deduction allowed is for the cost of acquisition—what you paid to buy the NFT in the first place.
What You Need to Report on Your Tax Returns
Investors are advised to disclose all crypto wallets when filing their taxes. It’s essential to report the TDS deducted on your transactions, as the tax is automatically deducted by the exchange and linked to your PAN card.
Make sure that the TDS that was collected is accurately reflected in your Form 26AS. This will help you avoid any discrepancies when you file your income tax returns.
Conclusion: Seek Professional Help for Crypto Taxation
Crypto taxation in India can be complicated, and since there’s no way to offset or carry forward losses, it can be difficult to manage. Making mistakes in this process could result in fines or penalties. To avoid these issues, it’s a good idea to consult with a financial and tax expert who is knowledgeable about crypto tax rules.
