Crypto and Taxes in India: Simplifying the Complex Digital Asset

Cryptocurrency, commonly known as Crypto, has attracted lot of attention in recent times from many investors and regular people alike especially after the Indian Government’s recent plan to tax the Virtual Digital Assets (VDA). Popular cryptocurrencies like Bitcoin and Ethereum along with other digital assets such as Non-Fungible Tokens (NFT) are few popular examples of Virtual Digital Asset (VDA).

But what exactly is cryptocurrency or VDA, and how does it work? In this blog, we will break down the basics, its taxability, its advantages, the challenges you might face, and what the future of such digital assets look like.

What is Virtual digital asset (VDA)?

A virtual digital asset is something that holds value primarily on the internet. Imagine it like a special kind of money, picture, or item that you can’t touch or hold, but you can own on the internet and has value.

What is Cryptocurrency?

Cryptocurrency is a type of VDA, that can be used as online coins or mode of payment to buy things or saved for later use such like regular money. Cryptocurrencies are protected using unique codes and no person or organization, like a government or bank, controls it. Instead, it is managed by a network of computers online.

How to Buy and Sell Cryptocurrency in India: A Guide for Trading

1. Choose a Reliable Platform:

Select exchanges like WazirX, CoinSwitch Kuber, or ZebPay. Look for security features, low fees, and compliance with regulations—important for tax reporting.

2. Set Up Your Account:

• Registration: Provide your email and create a secure password.
• KYC (Know Your Customer): Submit documents like Aadhaar or PAN card. This step helps to confirm your identity and to link your transactions for tax filings.

3. Deposit Funds:

You can deposit funds in your account via different banking channels such as bank transfer, UPI, etc.

4. Select Your Trading Strategy:

You can decide whether you want to trade short-term (day trading) or long-term (Holding) based on market analysis.

5. Execute the Trade:

Buy or sell cryptocurrency based on your strategy, using limit orders or market orders for better control. Set stop-loss and take-profit levels to minimize losses and lock in gains.

 6. Store Assets Safely:

Transfer long-term holdings to a hardware wallet instead of keeping them on exchanges.

 7. Stay Informed & Compliant:

Keep up with market news, tax regulations, and government policies regarding cryptocurrency.

Warning:  Cryptocurrency trading is highly volatile. Trade at your own risk and always conduct proper due diligence.

Tax on VDA’s In India

Virtual assets were freely traded in India for a long time without any restrictions. But 01/04/2022 onwards, India’s Finance Minister Nirmala Sitharaman, introduced taxes on VDA’s.

Here’s a detailed overview of the taxes on VDA in India:

1. Taxability on Profit of VDA’s:

A flat 30% tax will be charged on profits earned from the sale of virtual digital assets (VDAs), including cryptocurrencies, as per the Income-Tax Act and rules introduced on 01/04/2022. (u/s. 115BBH).

The VDA-related income/profit is taxed irrespective of whether you trade regularly or invest in it. If you are investing in VDA’s, period of your holding does not affect the tax calculations.

For example:

Let’s say you bought Bitcoin worth ₹1,00,000. Later, it’s value increased up-to ₹1,50,000 and you decided to sell it, making a profit of ₹50,000.

Here the profit on sale of VDA will be taxed at 30% i.e. you will have to pay ₹15,000 as tax on the profit earned.

2. Impact of TDS on VDA transactions:

• TDS Obligation: 1% TDS A(Tax Deducted at Source) was introduced under Section 194S of the Income Tax Act by the Finance Act, 2022.
• Effective Date:  This rule became effective from July 1, 2022, for transactions involving the transfer of VDAs (Virtual Digital Assets).
• TDS is applicable on VDA transactions, wherein the broker or trading platform have to deduct the TDS u/s. 194-S, if the transaction value exceeds:
  • ₹50,000 in a financial year for specified person*.
  • ₹10,000 in a financial year for others.
    * Specified person means an Individual or HUF whose business turnover is below ₹1 crore or professional income is below ₹50 lakh in the financial year before the year in which the transaction is taking place. And the Individuals or HUF does not have any income from business or professional activities.​

For example:

Let's take an example you trade in cryptocurrency. Here's how Tax Deducted at Source (TDS) applies to you:

Scenario 1:  If you transfer crypto worth ₹10,000 in a year, irrespective if you are a specified person or not, no TDS will be applicable.

Scenario 2: If you transfer crypto worth ₹40,000 in a year to a specified person, no TDS will apply because the transaction value is below ₹50,000.

But in case if you are not a specified person then TDS will be 1%on ₹40,000 i.e. ₹400 will be deducted as TDS.

Scenario 3: If you transfer crypto worth ₹80,000 in a year, if you are a specified person or not, TDS will be 1% on ₹80,000. In this case, ₹800 will be deducted as TDS.

Clarification regarding TDS by the Income-tax department:

• If you buy something online and make a payment through an e-commerce platform, usually TDS u/s. 194-Oapplies to the transaction. However, if you're buying any VDA like cryptocurrency, then TDS u/s. 194-S,as explained above, will apply instead and the general TDS rule for e-commerce transactions of Sec. 194-O won’t be applicable. This clarification regarding TDS was given by the Income-tax department in its Circular no. 23/2022 dated 03rd November 2022.
• 2. It’s important to know whether Virtual Digital Assets (VDA) are considered "goods" to decide if TDS under Section 194Q applies. But the Income Tax Department clarified that if TDS is already deducted under Section 194S(which is specific to VDA), then TDS under 194Q is not needed. This was stated in Circular no. 14/2022 dated 28th June 2022.

TDS on VDA Barter Exchanges:

• TDS also applies to barter exchanges of VDA’s, where one VDA is exchanged for another.
• In barter exchanges, the TDS must be calculated based on the fair market value of the VDAs being exchanged.
• Both the buyer and the seller in a barter exchange are considered buyers and hence must ensure that TDS is deducted before completing the transaction.
• If the barter transaction takes place on an exchange, the exchange may deduct TDS to make compliance easier for the buyers.
• If the transaction is done directly between parties (outside an exchange), both parties are responsible for deducting and paying TDS before completing the transaction.

How to Calculate TDS in case of barter exchange:

• The TDS amount in a barter exchange is calculated based on the fair market value of the VDA’s being exchanged and both the parties need to agree on the value to ensure the correct TDS amount is deducted.
• Let us understand this through an example:
  Mr. Munna wants to exchange his Ethereum (ETH) for Litecoin (LTC) owned by Mr. Circuit. The exchange rate decided between the two parties is 1 ETH = 5 LTC. And the current market prices are 1 ETH = ₹2,50,000 and 1 LTC = ₹51,000

Now for the TDS Calculation:

• In case of crypto-to-crypto transactions, both parties are required to deduct 1% TDS on the transaction value. The TDS is calculated based on the fair market value of the transferred cryptocurrency in Indian Rupees (INR).
• For Mr. Munna, ETH Holder (Seller of ETH, Buyer of LTC):
  • Although he is buying LTC in exchange of a ETH. The price he is paying here is 1 ETH or ₹2,50,000. Therefore, the Transaction Value is ₹2,50,000
  • TDS Deducted is 1%of ₹2,50,000 = ₹2,500.
  • Now, Mr. Munna will only make payment of ₹2,47,500 (₹2,50,000-₹2,500) in form of ETH.
  • Hence, Mr. Munna will pay ETH worth ₹2,47,500 or 0.99 ETH (i.e. ₹2,47,500/₹2,50,000).
• For Mr. Circuit, LTC Holder (Seller of LTC, Buyer of ETH):
  • He is buying ETH in exchange of LTC. The price he is paying here in form of 5 LTC is worth ₹2,55,000 (i.e. ₹51000 x 5).
  • Therefore, TDS Deducted is 1%of ₹2,55,000 = ₹2,550
  • Now, Mr. Circuit will only make payment of ₹2,52,450 (₹2,55,000- ₹2,550) in form of LTC.
  • Hence, Mr. Circuit will pay LTC worth ₹2,52,450 or 4.95 LTC (i.e. ₹2,52,450/₹51,000).
• In case the above transaction takes place through an exchange, the TDS will be deducted by the broker or exchange on behalf of the parties involved.
• For Exchange of VDA not directly traded in India:
  • If the exchange involves any VDA which is not directly traded in India or Fair market value of such VDA cannot be determined directly in Indian Rupees.
  • In such case the Value of VDA will be first converted to primary VDA that is traded in India and Fair market value of such VDA can be ascertained in Indian Rupees and then determine the amount of TDS.
  • For e.g. Let’s say there is a Cryptocurrency called BNB, fair market value for which cannot be directly determined. In such case, the BNB will be converted to Bitcoin or Ethereum, and based on such conversion its value will be determined.

Reporting Transactions:

All VDA transactions, including those involving TDS, must be reported using specific forms, like Form 26QE, to ensure compliance with tax rules.

Consequences of Non-Compliance:

• Failing to deduct or deposit TDS can result in penalties, interest charges, and potential legal consequences.
• Earlier, any undisclosed VDA was not considered as an Undisclosed Income. However, after Budget 2025, any undisclosed VDA will also be covered under Undisclosed Income and penalty for undisclosed Income shall apply.

3. Calculation of Taxes on VDA’s:

Let's understand the calculation through an example:

Mr. Majnu purchased Ethereum (ETH) at ₹1,00,000. He also incurred transaction expense of ₹5,000 while buying the Ethereum (ETH). He later sold the Ethereum for ₹1,50,000 after incurring expenses of ₹7,500.

Solution:

1. Sale Value: ₹ 1,50,000*

2. Cost of Acquisition: ₹ 1,00,000*

* Note: Any transaction expenses other than the cost of acquisition or sale value, are not permitted.

3.Taxable Profit: Sale Value - Cost of Acquisition

   Taxable Profit = ₹1,50,000 - ₹1,00,000 = ₹50,000

4. Tax on Profits: Tax = 30% of Taxable Profit = 30% × ₹50,000 = ₹15,000

Here are some other examples of tax implications related to cryptocurrency in India:

Gifting Cryptocurrency:

• Crypto gifts are considered as taxable income. As per general provisions of Income-Tax Act, 1961, Gifts from relatives are not taxed, but gifts from non-relatives are taxed if the value of gifts exceeds ₹50,000.
• If you receive 1 Bitcoin worth ₹1,00,000 as a gift from a relative, there will be no tax on it as it’s from a close family member. However, if you sell it later for ₹1,20,000, you’ll pay 30% tax on the amount of profit i.e. ₹20,000.
• However, if the same bitcoin of ₹1,00,000 is received from a friend it will be treated as your income and will be taxable.

Receiving Crypto as Payment:

• If you receive a Bitcoin as a form of payment for goods or services worth ₹2,00,000, it’s fair value at the time of receipt will be considered as your income and will be taxable.
• If you later sell the Bitcoin for ₹2,50,000, you’ll pay 30% tax on the ₹50,000 gain.

Airdrop of Cryptocurrency:

• Airdrop means cryptocurrency tokens that are directly sent to wallet addresses, mostly for free, similar to reward points.
• If you receive free tokens through an airdrop, say worth ₹50,000, it is considered as your income and will be taxable. If you later sell those tokens for ₹70,000, you will pay 30% tax on the ₹20,000 profit.

Mining Rewards:

• Mining is the process of using powerful computers to check and confirm transactions on a blockchain network and add them to the system.
• Crypto assets received at the time of mining will be taxed on the fair market value on the date of receipt. Tax will be levied at 30% on such value.
• The income received from mining will be taxed at a flat 30%. The cost of acquisition for crypto mining will be considered ‘Zero’ for computing the gains at the time of sale. No expenses such as electricity or infra cost can be included in the cost of acquisition.
• If you mine 10 Litecoin, and the current market value is ₹2,000 per Litecoin, your total value of mined Litecoin is ₹20,000. If you sell it later for ₹30,000, you will pay 30% tax on the ₹10,000 profit.