As the popularity of cryptocurrencies continues to surge, many investors are taking the plunge into the world of digital assets in India. However, while the potential for high returns is undoubtedly a draw, it’s important to adhere to applicable regulations and undertake tax compliances according to the same. 

In India, capital gains tax is levied on the profits from selling capital assets. Cryptocurrencies, like Bitcoin and Ethereum,(also referred to as Virtual Digital Assets or VDAs) fall under the definition of capital assets and are, therefore, subject to capital gains tax. However, calculating capital gains tax on crypto investments in India can be a complex process, but it’s essential to understand the same in order to remain compliant with tax laws. 

Factors such as:

• the purchase price
• selling price
• holding period
• and type of capital gains (short-term or long-term). Short-term/ long-term gain is immaterial to capital gain taxation for VDAs. You can remove this.

A closer look at the Capital Gains Tax:

Capital Gain Tax is imposed on the profits generated from the sale of an asset. This tax applies when a capital asset is transferred from one owner to another. Unlike other capital gains, crypto/ VDAs do not have a separate rule for short-term or long-term capital gains. 

It’s important to note that the Income Tax Act excludes capital assets received under inheritance or gifts received from immediate family members from the levy of capital gain in the hands of the recipient. However, if the inheritor decides to sell the capital asset, they will be required to pay capital gains tax on the total value of the consideration received. The same principle extends to inheriting VDAs 

When calculating capital gains tax on cryptocurrencies, there are some unique considerations to keep in mind. Let’s find them out. 

The 2022 Budget Update on Cryptocurrency Taxation:

In the 2022 budget, Finance Minister Mrs Nirmala Sitharaman has classified cryptocurrency as a virtual asset, which includes popular digital currencies like Bitcoin, Ethereum, and NFTs. However, while discussions on this classification continue, the Indian government has yet to assign these virtual digital assets to asset classes like stocks, bonds, or real estate.

Regarding the taxation of cryptocurrency, here are a few essential points to keep in mind:

• Any income generated from the transfer of virtual digital assets, including crypto and NFTs, will be taxed at a flat rate of 30% at the end of each fiscal year.
• Deductions cannot be claimed except for the cost of acquisition when reporting income from transferring these digital assets.
• Losses incurred from these digital assets cannot be offset against any other income.
• The tax will be levied on the recipient if a digital asset is gifted.
• Losses incurred from one digital currency cannot be offset by another virtual digital asset.
• A 1% TDS will also be imposed on all transactions of virtual digital assets.

In summary, the Indian government has classified cryptocurrency as a virtual asset and is in the process of determining its assignment to an asset class. Accordingly, income generated from the transfer of these virtual digital assets will be taxed at a flat rate of 30%, and no deductions can be claimed except for the cost of acquisition. In addition, losses incurred from these digital assets cannot be offset against any other income, and there will be a 1% TDS on all transactions (to be deducted by the buyer or the crypto exchange as the case may be).

How is the 30% Crypto Tax being Calculated in India?

Individuals who invest in or trade cryptocurrency and those who transfer virtual assets in a given financial year are subject to a flat income tax rate. Unlike other asset classes, there is no differentiation between short-term and long-term gains. Any profits resulting from the transfer of virtual assets will be subject to a 30% tax rate, which applies regardless of the nature of the income.

When Crypto profits are classified under Capital Gains

When crypto-related transactions are classified as investments, any profits earned from such transactions will be considered capital gains for tax purposes in India. However, in the event of a loss incurred from these transactions, there are currently no clear and specific tax regulations introduced by the Indian government.

When Crypto profits are classified as Business Income

If a person’s crypto transactions are considered part of their business income, it is important to examine the Goods and Services Tax (GST) implications. According to GST regulations, anything other than Goods, Securities, and Money is classified as a ‘Service.’ This also includes activities that involve using money or converting it via cash or any other mode, for which a separate fee is charged. Based on this definition, the buying and selling of crypto tokens would be subject to GST, either as a supply of Goods or Services. Exchanges charge commissions for buying and telling on their platforms for cryptocurrency.

In such cases, If both buyer and seller are located in India or the seller is in India, GST liability arises if any  is done by exchanges. If both parties are located outside India or the transaction is made on international foreign exchanges, GST liability is not attracted as a place of supply is outside India.

No GST liability is raised on the receipt of tokens as a result of mining. However, on sale there might be GST attracted unless sold outside India.

As of now there are still no major clarifications on GST applicability for the sale of crypto, It is expected to give clarifications in the coming future.

When Crypto profits are classified as Other Sources of Income

Although crypto assets may be considered a form of income, the IT department has yet to clarify whether they should be classified as “Other Sources.” As a result, you need to file your income tax return and ensure that you pay taxes on any gains you may have earned from Virtual Digital Assets (VDAs).

Despite the disclosure as “Capital Gain” or “Income From Other Sources” or “Business Income”, the taxation of VDAs is governed by the provisions of Section 115BBH, and not as per the provisions under which the heads of income are disclosed.

Conclusion:

Accurately calculating capital gains tax on cryptocurrency investments can be a complex process, but ensuring compliance with tax laws and regulations is crucial. Keep a detailed record of all crypto transactions and understand the tax rates and rules that apply to your VDA investments. 

Remember that paying taxes on time is not only a legal obligation but also a responsible and ethical practice that contributes to the betterment of society. Furthermore, you can manage your crypto investments with confidence and peace of mind by staying informed and proactive.

byRhea Tripathy

Meet Rhea Tripathy, a word wizard with a pen in one hand and a paintbrush in the other. By day, she slays as a content writer and by night, she indulges in her artistic passion. With a keen eye for the markets and a knack for literature, this certified trader brings her sharp mind and creative flair to everything she does. When she's not crafting clever content, you'll find her analyzing the latest market trends or getting lost in a good book.

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