Investing one’s resources in virtual digital assets has gained a sizeable following, with millions of investors across the subcontinent. However, recently the Indian government has implemented an amendment to the taxation legislation to regulate virtual digital assets (VDA(s)) and impose taxes on the income generated from them. This inevitably led to many investors looking for ways to avoid taxable gains on VDAs in India legally. In this article, we will explore various strategies and legal perspectives on this matter.

Understanding Cryptocurrency and Its Tax Implications

A cryptocurrency is a form of digital money that operates on a decentralised network called the blockchain. It allows for secure and transparent transactions without the need for intermediaries like banks. The income generated from VDA trading or investments is now subject to taxation in India.

The 2022 amendment to the Income Tax Act, 1961 (IT Act) has introduced Section 115BBH, under which gains from VDAs are taxed at 30%. Furthermore, Section 194S mandates that tax will be deducted at source (TDS) on all transactions involving the transfer of VDAs with effect from July 1, 2022. Additionally, it is to be noted that no set-off and carry forward of losses has been allowed for any losses that may be incurred while engaging in VDA transactions.

Strategies to Legally Minimise Taxable Gains

1. Reporting Cryptocurrency Income

It is essential to report all VDA income to the Indian tax authorities; any failure to do so can be considered tax evasion and lead to serious legal implications. Therefore, all Indian investors should ensure that they accurately report their VDA income in their tax returns to avoid any legal issues in the future.

2. Taking Advantage of Tax Deductions

Individuals investing in VDAs are recommended to carefully examine the TDS thresholds stipulated under Section 194S of the IT Act since the threshold is INR 50,000 for certain situations specified in the provision and INR 10,000 for others. Investors should consult with a tax professional to understand the deductions applicable to their specific situation since deductions such as the cost of acquisition incurred for trading can be claimed to reduce one’s taxable income.

3. Gift and Inheritance Tax Exemptions

In India, gifts received from specified relatives are exempt from taxation, subject to a threshold limit of Rs. 50,000. Therefore, if an individual receives VDAs as gifts from a list of notified relatives, it may not be subject to taxation. Similarly, in the case of inheritance, VDAs inherited from a deceased relative may be exempt from tax. However, consulting with a tax professional is crucial to ensure compliance with the relevant tax laws.

4. Seek Professional Advice

Navigating the complexities of cryptocurrency taxation in India can be challenging. It is advisable to seek professional advice from tax experts or chartered accountants who specialise in VDA taxation. They can guide tax planning and help investors legally minimise their taxable gains.

Legal Perspectives on Avoiding Taxable Gains

Although there may be strategies to minimise taxable gains on VDAs in India legally, it is essential to understand the legal perspectives on this matter. According to legal experts, the new tax regime introduced through the Finance Act 2022 imposes a 30% tax on the income generated through VDA trading, regardless of the location of the exchange.

It is pertinent to note that contrary to popular belief, investing in foreign exchanges does not absolve Indian investors from their tax obligations. The taxable event is the profit earned through VDA trading, and it is subject to taxation for Indian residents, irrespective of the location of the exchange. Therefore, moving the base of the exchange to another country does not exempt Indian investors from the tax regime.

Conclusion

The Indian tax authorities are vigilant about ensuring compliance with tax laws, and not reporting cryptocurrency income can be considered tax evasion. It is crucial for investors to report their income accurately and comply with tax laws to avoid any legal hassles.

While many Indian investors may seek ways to avoid taxable gains on VDAs legally, it is essential to understand the legal obligations and comply with the tax laws. Holding VDAs for the long term, reporting income accurately, taking advantage of tax deductions, and seeking professional advice are some strategies that may help investors minimise their tax liability. By staying informed and adhering to the regulations, investors can responsibly navigate the VDA taxation landscape in India.

byAditi Mendiratta

Aditi is a corporate lawyer with a knack for writing that ranges from fictional stories to long-form legal content. Armed with a dual degree in law and mass communication, she aspires to put words to their best use to inform, educate and entertain.

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