Key takeaways
- Cryptocurrency transactions in India are subject to a 30% flat tax on any profits, plus a 4% cess.
- A 1% tax deducted at source (TDS) applies to transactions exceeding a certain threshold.
- Crypto losses cannot be offset against other income or carried forward to future years.
- Detailed reporting of all crypto transactions is required on the Indian Income Tax e-filing portal.
India’s approach to cryptocurrency taxation has evolved significantly, creating a framework that outlines what you owe — and it’s not as straightforward as you might have hoped. Given India’s specific cryptocurrency tax regulations, it’s crucial to understand the implications, whether you’re trading, holding or earning income from cryptocurrencies.
Here’s a comprehensive guide covering key aspects like crypto tax rates in India, compliance and filing requirements to keep you on the right side of the law.
Is crypto taxed in India? A regulatory overview
Since 2022, India has seen evolving regulations as it navigates the global digital finance landscape. Initially, the Indian government approached crypto with caution. Over the years, as crypto trading grew more popular, regulatory frameworks began taking shape to protect investors and establish a more straightforward tax environment.
In 2022’s financial budget, the Indian government included a bill introducing crypto taxation. Section 115BBH of the 2022 Budget levied a 30% tax on the profits of trading cryptocurrencies or other virtual digital assets (VDAs) from April 1, 2022.
This created a buzz on X, with a meme fest breaking out and many questioning whether crypto was now legal in India since it was taxable.
India’s Finance Minister Nirmala Sitaraman clarified and was quoted at a high-level panel discussion organized by the International Monetary Fund:
“We haven’t said that this is currency. We haven’t said that this has intrinsic value, but certain operations are taxable for the sovereign, and that is why we have taxed”.
She added, “We did announce that the income generated out of the transactions of these crypto assets will be taxed at 30 percent, and over and above that, there is a 1 percent tax deduction at source, which is also imposed on every transaction. So, through that, we will be able to know who’s buying and who’s selling it.”
She also set the stage for two important milestones:
- Pilot central bank digital currency (CBDC) project launched in India.
- India’s G-20 presidency focused on the development of a global crypto regulation framework.
Additionally, in Budget 2022, Section 115BBH also introduced a 4% cess on income from VDAs, in addition to the standard 30% tax rate. A cess is a tax the government levies for a specific purpose. In India, it is usually imposed to raise funds for particular initiatives or projects, such as education, healthcare or infrastructure development.
Here are some major developments over the last three years:
The government’s stance shows that India is not seeking an outright ban on crypto; it is trying to introduce stringent measures to curb misuse while allowing for innovation in a controlled environment.
Did you know? The Indian government collected over ₹60 crore INR (about $7.3 million USD) through the 1% TDS on crypto transactions in just seven months following its introduction in July 2022. This revenue reflects the high transaction volume in India’s crypto market, despite a still evolving regulatory and tax structure.
Which crypto transactions are subject to tax in India?
Here’s a quick table summarizing the taxation of various crypto transactions in India, along with their tax impact:
Now, let’s dive deeper into each transaction type and its tax implications in India.
How crypto gains are taxed in India
To elaborate on crypto taxation, a new clause (47A), Section 2, was introduced into the Indian Income Tax Act to define the term Virtual Digital Assets (VDAs). The definition is detailed and essentially covers any information, code, number or token (not being Indian currency or foreign currency), generated through cryptographic means, including cryptocurrencies, NFTs, tokens, CBDCs and more, irrespective of the name they may be given.
How much tax is applicable on different types of crypto income sources:
- Buying: Buying cryptocurrency in India is subject to a 1% TDS, deducted at the time of purchase. Still, simply hodling cryptocurrencies doesn’t trigger any tax liability. When you sell, trade or even buy crypto using stablecoins, a 30% tax applies to any profits. Similarly, trading one cryptocurrency for another is also a taxable event, with a 30% tax on profits.
- Trading and selling: Profits from trading or selling crypto are considered capital gains and taxed at the 30% flat rate. Losses in crypto transactions cannot be set off against other income.
- Staking and mining income: Earnings from staking or mining are treated as “income from other sources” and are also taxed at 30%.
- Airdrops: The fair market value of the tokens on the date of the airdrop is counted as taxable income and subjected to the 30% tax rate. If airdropped tokens are later sold, any additional gains from the sale would also be taxed at 30%, making it crucial to keep records of the token’s value at each stage.
- Hard fork and soft fork: In a hard fork, where a new cryptocurrency is created, you'll be taxed at your individual income tax rate on the fair market value of the new coins received. Subsequent transactions, like selling or trading these coins, are subject to a 30% capital gains tax on any profits. In contrast, a soft fork doesn't create new assets, so there's generally no immediate tax implication.
- Gifted crypto: Cryptocurrency received as a gift exceeding 50,000 INR in value is taxable, barring exemptions for gifts from immediate family members.
- Donations: Cryptocurrency donations to registered charities in India are not tax-deductible. Instead, they are treated as the disposal of an asset, and any profits from such donations are subject to a 30% capital gains tax.
Did you know? While gifts from family members are exempt from taxation in India, all crypto gifts must be declared in tax returns or you may face penalties or scrutiny from tax authorities.
Understanding the 1% TDS on crypto assets in India
Tax deducted at source (TDS) is a means of collecting income tax in India in which a percentage is deducted at the point of payment. A fixed rate of 1% applies to the total transaction value of VDAs when trading or transferring cryptocurrencies.
Who deducts TDS?
- Crypto exchanges: If you trade on a compliant crypto exchange in India, the exchange will automatically deduct and deposit the TDS with the government.
- P2P and overseas traders: The buyer is in charge of deducting the TDS and submitting it to the government for peer-to-peer (P2P) transactions or trades on overseas exchanges.
- Crypto withdrawals: 1% TDS is paid when converting crypto to Indian rupee (INR) using any means such as crypto wallet, exchange, etc.
This upfront deduction can affect liquidity since 1% of the transaction value is withheld at each trade. It’s crucial for investors to factor this into their trading strategies.
Failure to comply with TDS regulations can lead to penalties and interest charges. Investors must ensure they fulfill their TDS obligations to avoid legal issues.
Filing your crypto taxes in India: Step-by-step process
Ready to file your crypto taxes? Let’s take it step-by-step to help you navigate the process:
Step 1: Gather documentation
Collect all relevant transaction records, including trading history, purchase receipts and any income generated from crypto (like staking or airdrops). Use a reliable crypto tax calculator to help you quantify your gains and losses accurately.
Step 2: Log in to the Income tax portal
Visit the official Income Tax Department website. Log in using your credentials. If you don’t have an account, you must create one by providing your PAN and other details.
Step 3: Choose the ITR form
Depending on your income sources, select the appropriate Income Tax Return (ITR) form. Most individuals trading in crypto should use ITR-2 (reporting as capital gains) or ITR-3 (reporting as Business Income).
The ITR-2 and ITR-3 forms have a dedicated space to report crypto gains or income. You will report your crypto profits under “Schedule VDA” in the tax return. Navigate to the “Capital Gains” section of the chosen ITR form. Input the details of your crypto transactions: details for each asset, acquisition cost, sales proceeds and calculate the gains/losses accordingly.
If applicable, report income from staking or airdrops under the “Income from Other Sources” section.
Step 4: Verify and submit your return
Review all entries to ensure accuracy. The Income Tax Department is stringent about discrepancies. Submit your ITR electronically on the portal.
Step 5: Complete the verification process
After submission, verify your ITR through any of the available methods (Aadhaar OTP, net banking, etc.). This step is crucial for your return to be considered valid.
Step 6: Pay any taxes due
If your calculation shows taxes due, make the payment before the due date to avoid penalties. You can pay through the Income Tax Portal under the e-Pay Tax section.
Did you know? The deadline to file your ITR for FY 2023-24 was July 31st, 2024. But a belated return can be filed by Dec. 31st, 2024.
Are any crypto transactions tax-free in India?
You won't have to pay taxes on activities like holding cryptocurrency without trading (hodling), transferring crypto between your own wallets or receiving crypto gifts from close family members. Additionally, gifts of crypto up to ₹50,000 from friends and relatives are also tax-exempt.
What happens if you lose your crypto or it is stolen?
Notably, the Income Tax Department (ITD) hasn’t provided specific guidance on the tax implications of lost or stolen crypto. Based on general tax principles, it’s unlikely you’d be taxed on lost or stolen crypto. Still, given the ITD’s strict stance on crypto losses, it’s improbable that you could claim a tax deduction for these losses.
The future outlook for crypto taxation in India
What’s next for crypto taxes in India? The rules are still changing, and as global frameworks shape up, more clarity may be forthcoming.
A few evolving areas that crypto investors should be aware of include:
- Global frameworks and collaboration: As part of its G20 presidency, India is collaborating with international organizations like the Financial Action Task Force to propose crypto regulations that prioritize both transparency and investor security. This international approach may help create a more uniform tax framework, making compliance easier for investors.
- Possible adjustments in TDS and tax rates: Industry experts have raised concerns over the high tax rate and 1% TDS on every transaction, suggesting that these policies could hinder the growth of the crypto market in India. There is speculation that future budgets may reduce the TDS rate or provide more favorable tax conditions.
- CBDCs: With the Reserve Bank of India pilot projects for a digital rupee underway, new tax policies could emerge to better integrate CBDCs with the current tax framework for VDAs. This might also usher in more transparency and traceability, affecting how crypto transactions are taxed.
India’s progressive yet cautious approach to crypto taxation signifies its focus on fostering innovation within a regulated environment. Investors are advised to keep accurate records, file timely returns and remain updated on tax regulations. As international frameworks become more defined, crypto taxation in India may simplify, providing a more supportive landscape for digital asset investments.
Written by Shailey Singh