Virtual digital assets (VDA(s)), including but not limited to cryptocurrencies, have gained significant popularity in recent years, and with that, the trading of crypto derivatives, such as futures, has also seen a surge. As more traders engage in future trading of cryptocurrencies in India, it becomes crucial to understand the tax implications associated with these transactions. In this article, we will explore whether crypto tax is applicable for future crypto trading in India and shed light on the taxation aspects that traders need to consider before filing their income tax returns.

Understanding Crypto Futures

Before delving into the tax implications, let's first understand crypto futures. Crypto futures are contracts that obligate the buyer and seller to buy or sell a specific cryptocurrency at a predetermined price on a particular date in the future. These contracts can be used for speculation or hedging purposes and are generally settled in cash.

Taxation of Crypto Futures in India

1. Business Income Tax: In India, the taxation of crypto futures falls under the purview of business income. Any gains or profits arising from the sale or exchange of crypto futures contracts are treated as business income. The tax rate applicable will be the same as per normal business income. 
   
2. Basis of Taxation: Crypto futures are a form of derivative instrument, and the same are not treated as VDAs as the settlement is done by means other than actual delivery. Such business of crypto futures will be classified as any other speculative business, and the rules of set off and carry forward of losses will therefore apply to the same. Furthermore, provisions pertaining to tax deductions at source will also not apply to crypto futures as it is a form of derivative instrument.
   
3. Tax Planning Strategies: Traders can employ certain tax planning strategies to optimise their tax liability.

Taxation Nuances

Derivatives, being financial contracts dependent on the value of an underlying asset, do not possess inherent value in and of themselves. Instead, their worth is contingent upon the anticipated price fluctuations of the underlying assets. When referring specifically to derivatives based on cryptocurrencies such as Bitcoin, they are commonly referred to as cryptocurrency derivatives.

Upon careful examination of sections 2(47A) and 115BBH, it can be inferred that derivatives do not meet the criteria to be classified as VDAs (Virtual Digital Assets). As a result, investors are not obligated to pay taxes under section 115BBH since there is no actual transfer of VDAs. Consequently, cryptocurrency derivatives are considered speculative transactions, ultimately resolved through means other than physical delivery. Therefore, these derivatives are subject to taxation under the category of Business Income. Moreover, it is worth noting that Tax Deducted at Source (TDS) provisions do not apply to derivatives.

Reporting and Compliance Requirements

Audit and Documentation: Traders who have a turnover exceeding the notified amount in any financial year are required to get their accounts audited by a Chartered Accountant. Maintaining proper documentation, including contract notes, bank statements, and other relevant records, is essential to support the reported transactions and income.

Penalties for Non-Compliance: Non-compliance with the tax reporting and compliance requirements can lead to penalties and legal consequences. Therefore, traders must fulfil their tax obligations and maintain transparent and accurate records of their crypto futures transactions.

Taxation of International Crypto Futures Trading

Traders engaged in international crypto futures trading should also consider the tax implications in India and the foreign jurisdiction.

Foreign Taxation: The tax laws and rates applicable to crypto futures trading may vary from one country to another. Therefore, traders engaged in international trading should familiarise themselves with the tax laws of the foreign jurisdiction and ensure compliance with their reporting and payment obligations. Furthermore, it is pertinent to note that since Indian residents are subject to the regulations under the Income Tax Act, 1961 (IT Act), any income earned by them, including any income from investments on foreign exchanges, is subject to the provisions of the IT Act. Therefore investors should be careful while computing taxes on such investments and ensure that the tax liability is paid off in all jurisdictions. 

Conclusion

In conclusion, the taxation of crypto futures in India is subject to the business income tax head under the IT Act. Traders engaged in future crypto trading need to report their transactions accurately, maintain proper documentation, and fulfil their tax obligations. It is essential to consult with a tax professional to ensure compliance with the applicable tax laws and optimise tax planning strategies.

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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