Demystifying the Indian Crypto Tax Landscape

Learn about the evolving crypto taxation regime in India and how to stay compliant with expert advice on building a crypto portfolio, choosing the suitable exchange, record-keeping, calculating and paying taxes, and staying updated.

Indian Crypto Tax

With the rising popularity of cryptocurrencies, governments globally need help to regulate and impose taxes on them, and India is no exception. As more people in India invest in cryptocurrencies, comprehending the tax implications has become crucial. This beginner's guide offers a detailed outline of crypto taxes in India, covering different types of crypto taxation that may apply, calculating and reporting them, and essential aspects for taxpayers to consider. The article has the following sections:

  • Understanding crypto taxation in the Budget
  • Understanding the implications of taxes on cryptos
  • Ambiguity relating to tax on cryptocurrencies
  • Crypto sector brought under the provisions of the PMLA Act, 2002

Understanding crypto taxation in Budget

The Indian government has recognised digital assets, including cryptocurrencies and NFTs, as "Virtual Digital Assets" for the first time in the Budget 2022. The Indian government must still deliberate with the public about the detailed "Virtual Digital Assets" rules. In the meantime, the following crypto taxation has been announced in Budget 2022:

  • 30% income tax on crypto profits in each transaction
  • 1% TDS on sales
  • No deductions except the cost of acquisition on crypto asset income
  • Virtual assets given as gifts are subject to income tax, and the recipient must pay it
  • Loss from crypto assets cannot be set off against any other income
  • Losses from one crypto can't be balanced by income from another

Activities like Defi transactions, mining coins, airdrops, receiving payments, gifting crypto and more are not taxed at 30% but as per the recipient's income tax rate.

Understanding the implications of taxes on cryptos

It is essential to understand the tax implications on crypto gains in light of provisions in Budget 2022 and subsequent Acts/ Bills and more to take measures to ensure compliance and improve chances of reducing tax lawfully. Given below are specific ideas that can be implemented:

  • Carefully designing crypto portfolio: Investors in India cannot offset losses in one crypto asset with gains in another, so investing in a select list of assets is recommended. Since crypto is taxed more than other investments, investors should allocate only a tiny portion (less than 5%) of their portfolio to crypto.
     
  • Ensuring compliance: Global exchanges do not follow Indian TDS deduction and record-keeping regulations. Investors must ensure compliance by trading on Indian exchanges.
     
  • Tax computation, payment and offsetting TDS: Investors must report their gains in crypto and NFTs annually to the government and use available services to create a consolidated tax statement. The accuracy of tax filings is the investor's responsibility. 

Investors must pay 1% TDS on crypto sales, which can be offset against their annual crypto tax liability or recovered from the government if there is none.

Also ReadTaxing of NFTs under the IT Act

Ambiguity relating to tax on cryptocurrencies

As mentioned earlier, detailed rules are still being framed, and many issues need more clarity. Some of these are discussed below:

  • No clarity about TDS or taxation if a person is trading on an international exchange
  • Ambiguity over taxation of crypto gains when an Indian becomes an NRI
  • More clarity is needed on how income from crypto is treated
  • More clarity is needed on how crypto airdrops should be treated

The crypto sector brought under the provisions of the PMLA Act of 2002

India has brought the crypto sector under the Prevention of Anti-money Laundering Act, 2002 (PMLA), making it mandatory for crypto entities to record transactions and client data, monitor compliance, and report suspicious activities. This indicates that the government acknowledges the crypto sector's growing importance and emphasises the need for accurate activity tracking. The PMLA also makes KYC and enhanced due diligence obligatory, unifying the goal for crypto exchanges to function as reporting entities.

Also ReadTaxing of Digital Virtual Assets in India

The Indian government recognised cryptocurrencies and NFTs as "Virtual Digital Assets" in the Budget 2022 and has outlined specific taxation rules. As a result, investors must ensure compliance and carefully design their portfolios to reduce tax liability. The government has also brought the crypto sector under the PMLA Act 2002, making it mandatory for crypto entities to record transactions and client data, monitor compliance, and report suspicious activities.

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