In this article, we try to understand how taxation works on cryptocurrency
Cryptocurrencies are electronic money that, like traditional currencies, can be used to purchase goods and services. Due to its decentralized character, which refers to its functioning without the need of an intermediary like banks, financial organizations, or central authority, it has, nevertheless, been primarily contentious from its inception. More than 1,500 virtual currencies are exchanged now in the realm of digital currencies, including Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic, and others.
The amount of money invested in and traded in cryptocurrency has grown. In order to define “Virtual Digital Assets,” Section 2(47A) of the Income Tax Act was inserted, classifying cryptocurrency and NFTs as such. Although fairly comprehensive, the concept primarily refers to any information, code, number, or token created by cryptographic techniques (not Indian or foreign fiat money). Simply said, VDAs refer to all categories of crypto assets, such as NFTs, tokens, and cryptocurrencies, except gift cards and vouchers. Yes, bitcoin profits are taxed in India. The 2022 Budget made clear the government’s official position on cryptocurrencies and other VDAs.
Cryptocurrencies are categorized as virtual digital assets in India and are taxable.
According to Section 115BBH, profits from cryptocurrency trading are taxed at a rate of 30%(plus 4% cess). From July 1, 2022, Section 194S will impose 1% Tax Deducted at Source (TDS) on transfers of cryptocurrency assets if they reach 50,000 (or even 10,000 in some circumstances) in the same financial year. All investors who transfer digital assets during the year are subject to cryptocurrency tax, whether they are private or professional. Both short-term and long-term profits are subject to the same tax rate, which also applies to all other forms of income received by the investor.
Therefore, regardless of whether the income is classified as capital gains or business income, earnings from trading, selling, or exchanging cryptocurrencies will be taxed at a flat rate of 30% (plus a 4% surcharge). In addition to this tax, 1% TDS will be charged on the sale of any cryptocurrency assets worth more than Rs 50,000 (or Rs 10,000 in some circumstances).
A 30% tax must be paid if any of the following transactions are carried out:
- use cryptocurrency to pay for products or services.
- Cryptocurrency exchange for several cryptocurrencies
- Trading cryptocurrencies using fiat money like (INR)
- Get paid in cryptocurrency for a service.
- Getting a gift of cryptocurrencies
- cryptocurrency mining
- Getting paid with cryptocurrency
- Cryptocurrency stakes and stake rewards
- taking in airdrops
By withholding a specific proportion at the source, Tax Deducted at Source (TDS) intends to tax cryptocurrency traders and investors as and when they do a transaction. The TDS amount must be deducted from any payment the buyer owes the seller and sent to the federal government. The seller will only be given the remaining sum. The TDS rate for cryptocurrency in India is fixed at 1%. Beginning on July 1, 2022, while paying the seller for the transfer of Crypto/NFT, the buyer will be liable for deducting TDS at the rate of 1%. If the transaction occurs on an exchange, the exchange may withhold the TDS and give the seller the remaining funds. While foreign currency traders must manually deduct TDS and file their TDS returns, Indian exchanges automatically deduct TDS.
- P2P Transactions: In the event of P2P transactions, the buyer is in charge of deducting TDS and submitting Form 26QE or 26Q, depending on the situation.
- For instance, purchasing bitcoin over a P2P network or a global exchange using (INR).
- Crypto-to-Crypto Transactions: A 1% TDS will apply to both the buyer and the seller.
- For instance, using stablecoins to purchase cryptocurrency.
Gains and losses on virtual currency transactions must henceforth be disclosed, according to the Ministry of Corporate Affairs (MCA). Additionally, the price of cryptocurrencies on the date of the balance sheet must be disclosed. As a result, beginning on April 1, 2021, revisions will be made to schedule III of the Companies Act. This requirement might be viewed as the government’s initial step toward regulating cryptocurrencies.
A loss in cryptocurrencies cannot be adjusted against any other income, including profits from cryptocurrency, according to Section 115BBH. Therefore, a crypto investor cannot offset losses on a crypto asset from a prior year while submitting an ITR this year. Additionally, save for the acquisition cost or purchase price, Indian bitcoin investors are not allowed to deduct costs linked to their cryptocurrency activity.
