How to file Crypto Taxes in India in 2023?

Until 2022, the Indian government did not have a clear position on how to categorize crypto assets or how to tax Bitcoin and other cryptocurrencies. However, things changed in 2022 when the Indian authorities finally recognized cryptocurrencies in India and labelled them as Virtual Digital Assets (VDAs).

To give a proper definition, they introduced Section 2(47A) into the Income Tax Act. The definition of Virtual Digital Assets (VDAs) is quite extensive and encompasses various elements.

In this guide, we aim to provide you with a comprehensive understanding of how cryptocurrency taxation works in India. We will delve into the details and explain certain basics that can help you with your crypto taxes.

How much tax will you pay on crypto in India?

When it comes to trading, selling, or using cryptocurrency in India, the tax rate for such activities is set at 30%, and there’s an additional 4% cess as per Section 115BBH. This tax rate aligns with the highest Income Tax bracket in the country, without considering any surcharge or cess. Furthermore, if you sell your crypto assets for an amount exceeding Rs 50,000 (or Rs 10,000 in certain cases) within a single financial year, you’ll be subject to a 1% TDS tax under Section 194S. This implementation began on July 01, 2022.

If you’re an investor, whether you’re doing it personally or as part of a business, it’s important to know that crypto taxes are applicable to all. Unlike other types of investments, there’s no specific tax advantage for holding onto your cryptocurrency for a longer period. Whether you make short-term gains or hold onto it for the long term, the tax rate remains the same regardless of the specific types of income you’ve earned. In the scenario where you have additional income from activities like mining or staking, you might also be required to pay income tax at your individual tax rate when you receive those earnings.

Read more about Indian Budget 2023 on Cryptocurrency: How much tax do you need to pay?

Paying tax on Crypto in India

Whenever you engage in certain transactions involving cryptocurrency, you might be liable to pay a 30% tax. These transactions include:

• Selling your cryptocurrency for Indian Rupees (INR) or any other fiat currency.
• Exchanging one type of cryptocurrency for another, which also includes stablecoins.
• Using your cryptocurrency to purchase goods or services.

What cryptocurrencies are taxable in India?

As we mentioned previously, it’s important to understand that Virtual Digital Assets (VDAs) are subject to taxation in our country. To put it simply, VDAs encompass various forms of crypto assets such as NFTs, tokens, and cryptocurrencies. However, it’s worth noting that gift cards or vouchers do not fall under the category of VDAs and are not subject to taxation.

Let me explain in simpler terms what these assets actually mean:

• These assets are like digital representations of something valuable that can be exchanged, whether you give something in return or not. They’re accompanied by assurances that have their own value, or they can be used to store value or measure things, like in economic trades or investments. But they’re not limited to just acquisition schemes. These assets can take the form of any kind of information, code, number, or token, excluding any Indian or foreign currency, though.
• Additionally, VDAs encompass non-fungible tokens (NFTs) or tokens that are comparable in nature, regardless of the name by which they are referred.
• It’s important to note that the Central Government holds the authority to define any other digital assets that fall under the category of VDAs through official gazette announcements.

Starting from April 1, 2021, the Finance law has introduced taxation on “transfers” of Bitcoin. In the context of cryptocurrencies, the Income-tax Act, specifically Section 2(47), provides a definition for the term “transfer,” which includes:

• when the cryptocurrency is sold, exchanged for something else, or released.
• when there is a loss of any rights associated with the cryptocurrency.
• when the cryptocurrency is acquired by force due to legal requirements

Tax Deducted at Source (TDS) on Crypto

When it comes to Tax Deducted at Source (TDS), the main goal is to tax individuals involved in crypto trading and investing. This is done by subtracting a specific percentage right at the beginning of a transaction. Let’s take a look at the types of transactions that fall under TDS:

• Firstly, we have P2P transactions. In this case, it is the buyer’s responsibility to deduct the TDS. Afterwards, they need to fill out either Form 26QE or 26Q, depending on the applicable form.
• Secondly, For crypto-to-crypto transactions, both the buyer and seller are subject to TDS at a rate of 1%.

However, the situation becomes more complex due to the fact that TDS withholding is not required if the payment is made by a “specified person” and the total value of their cryptocurrency trading activity remains below ₹50,000 within a single financial year.

What cryptocurrency transactions are tax-free in India?

Any kind of crypto transaction is taxable in India.

In no case, crypto transactions are tax-free.

T30% tax will always be imposed on you including:

• Receiving cryptocurrency as a gift.
• Engaging in coin mining activities.
• Receiving payments using cryptocurrency.
• Receiving stake benefits.
• Participating in airdrops.

The Individual Income Tax Slab Rates for FY 2022-23 (AY 2023-24) are:

How can I calculate my cryptocurrency taxes in India?

Let’s now explore how to calculate your profits after considering the 30% tax on your crypto earnings.

When you sell your cryptocurrency, you can determine your earnings by subtracting the amount you originally paid (cost basis) from the money you receive from the sale.

This can be explained simply as the Sale Price minus the Cost Price equals Gains. For instance, let’s say you purchased Bitcoin for 15,00,000 INR. After a few years, you decide to sell it for 20,00,000 INR.

In this situation, your income would be 5,00,000 INR. Remember, you can deduct the expenses associated with acquiring your cryptos, such as gas fees and exchange fees, from your initial cost.

In this case you need to pay: 30% of 5,00,000 INR as tax.

Cost Basis Determination

Many investors have a portfolio consisting of various crypto assets, so calculating gains and losses becomes more complex.

It becomes important to keep track of your cost basis for each asset, which impacts the overall gains and losses.

In India, the cost basis for capital assets like stocks follows the FIFO (first-in first-out) method, which means the first assets you bought are considered sold first.

It is logical to apply the same principle to determine the cost basis for cryptocurrency. When you sell your crypto, the cost basis will be based on the value of the earliest coins you acquired.

Crypto Tax Software in India

Crypto tax software is a special kind of software that comes in handy when you need to figure out and submit your taxes for transactions involving digital currency. It does all the heavy lifting by automatically crunching the numbers for your capital gains and losses from these transactions. Plus, it offers helpful guidance on properly reporting them when you file your taxes.

You can use crypto tax software whether you’re an individual or a business. There are several well-known options to choose from, such as Koinly, TokenTax, Accointing, and BitGo, among others. They’ve got you covered in this area!

You can check out more on Cryptocurrency Tax Software Market Scenario in 2022

Tax on Crypto losses

Investors in the world of crypto face some unfortunate news when it comes to losses.

According to Section 115BBH, any losses experienced in crypto cannot be balanced against any income, even if it’s gained from cryptocurrency. This means that if you faced losses from a crypto asset in a previous year, you cannot use them to offset your tax liability when filing your Income Tax Return (ITR) this year.

Moreover, Indian crypto investors are not permitted to claim any crypto-related expenses, except for the cost of acquisition or the buying price of the asset. It’s essential to keep these rules in mind while navigating the taxation landscape for crypto investments in India.

Let’s understand this with an example: Let’s say you purchased 0.5 Bitcoin at 20,00,000 INR/Bitcoin price and another 0.5 BTC at 30,00,000 INR price, and then you decide to sell 0.5BTC at 26,00,000 and another 0.5BTC at 20,000,000/BTC price. In this case, your cost of acquisition would be: 10 lakh plus 15 lakh = 25 lakh INR. Your total sell price would be: 13L plus 10L = 25 lakh INR.

Ideally you are in net loss. However, you still need to pay in taxes on your gain from the first trade: 30% on (13L-10L) = 30% of 3,00,000INR.

Reporting your crypto taxes

In India, the financial year (FY) stretches from April 1st to March 31st of the following year. So, for instance, the current financial year is from April 1st, 2023 to March 31st, 2024 (FY 2023-24). The deadline to submit your tax returns, if you’re not subject to audits, is July 3. However, for those who are undergoing an audit, the deadline extends to October 31.

Under the standard income tax rules, the taxable nature of your crypto gains depends on two factors: (i) your intention as an investor and (ii) the nature of the transactions themselves. Based on these factors, your gains can be classified either as business income or capital gains. It’s important to carefully assess the circumstances surrounding your crypto transactions to determine the appropriate classification for tax purposes.

To fulfil your tax obligations for the financial year 2022-23 and assessment year 2023-24, it’s important to declare your cryptocurrency taxes using the appropriate forms. If you’re reporting your crypto gains as capital gains, you’ll need to use the ITR-2 form. On the other hand, if you’re reporting them as business income, the ITR-3 form is the one to go for. The updated ITR forms now feature a dedicated section called ‘Schedule VDA’ where you can report your cryptocurrency gains or income.

Disclosing Crypto in Schedule of Assets and Liabilities

The Ministry of Corporate Affairs (MCA) has introduced a new requirement that companies must disclose their gains and losses related to virtual currencies.

Additionally, they need to report the value of cryptocurrency as of the balance sheet date. These changes have been incorporated into Schedule III of the Companies Act, effective from April 1, 2021. This marks the government’s initial step towards regulating cryptocurrencies.

It’s important to note that this mandate specifically applies to companies and individual taxpayers are not required to comply with these specific regulations. However, regardless of whether you’re an individual or a company, it’s crucial to fulfil your responsibility of reporting and paying taxes on any gains made from cryptocurrency.

Also Read:

• Comprehensive Taxation Guide For Cryptocurrency Investors
• Indians Take the International Crypto Exchange Route to Dodge Heavy Taxes

To conclude

The landscape of crypto investments has seen significant developments since 2017. Nowadays, more and more institutions are exploring the potential of investing in crypto assets.

The presence of taxation certainly positions crypto as a noteworthy asset in the eyes of decision-makers, although the Indian legislation concerning Virtual Digital Assets (VDAs) is still in the process of evolution. While it’s not possible to legally avoid the 30% tax, there are strategies you can employ to minimize your tax liability and take advantage of the long-term growth potential of your cryptocurrency.

Buying and holding your crypto for an extended period can be beneficial, as it allows you to reduce the impact of taxes and benefit from the potential appreciation of your coins over time. It’s important to note that the Government has introduced a new tax regime, but it’s likely that adjustments and amendments will be made as the industry evolves. It’s crucial to stay aware of the ongoing changes within the crypto industry and remain informed about the latest developments and regulations. By staying informed, you can navigate the evolving landscape more effectively.