Essential Guide to Crypto Tax in India: Mastering the Process

Cryptocurrencies have gained immense popularity in India in recent years as an emerging asset class.

However, the taxation of virtual digital assets (VDAs) like Bitcoin and Ethereum remains a complex and evolving topic.

In this comprehensive guide, we’ll break down everything you need to know about how crypto is taxed in India based on the latest rules and regulations.

Crypto traders, investors, and beginners need to comprehend their tax responsibilities to prevent penalties and adhere to regulations.

We’ll cover income tax on crypto gains, TDS, GST, tax on airdrops, mining, staking, and more. Plus, we’ll share some tips on how to securely store your crypto using hardware wallets like the Material Bitcoin Standard Version.

Is Crypto ‘Currency’ Or An ‘Asset’?

Before diving into taxation, it’s important to clarify that cryptocurrencies are not considered legal tender or currency in India.

Instead, the Indian government has classified crypto as “virtual digital assets” for taxation purposes starting from the financial year 2022-23.

This means that any income earned from the transfer of crypto assets is taxable as per the Income Tax Act. Crypto is treated similar to other capital assets like stocks or mutual funds when it comes to taxation.

What are Virtual Digital Assets?

As per the Finance Act 2022, a Virtual Digital Asset (VDA) is defined as:

• Any information, code, number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment schemes
• A non-fungible token (NFT) or any other token of similar nature, by whatever name called
• Any other digital asset as may be notified by the Central Government

This broad definition covers most cryptocurrencies, utility tokens, governance tokens, NFTs and more. Basically, if you’re dealing with any blockchain-based digital assets, they will likely be considered VDAs for tax purposes in India.

Is Crypto Taxed In India?

Yes, any income earned from the transfer of virtual digital assets (cryptocurrencies) is taxable in India as per the latest rules introduced in the Union Budget 2022. This includes:

• Gains from selling crypto for INR or other fiat currency
• Gains from trading one crypto for another
• Airdrops and hard forks
• Mining income
• Staking/forging rewards
• Crypto received as gifts

The tax rate on such crypto income is a flat 30%, plus applicable surcharge and cess, irrespective of your income tax slab. This is significantly higher compared to tax on stocks or mutual funds.

How much tax do you pay on crypto in India?

As per the latest crypto tax rules, any income from the transfer of virtual digital assets is taxed at a flat rate of 30%.

For example, let’s say you bought 1 Bitcoin for ₹20 lakhs and sold it later for ₹30 lakhs, making a profit of ₹10 lakhs. You would need to pay 30% tax on this gain, which comes to ₹3 lakhs, irrespective of your income tax bracket.

Additionally, a 1% TDS (tax deducted at source) is also applicable on the sale value of crypto assets from 1st July 2022. In the above example, a TDS of ₹30,000 (1% of ₹30 lakhs) would also be deducted by the buyer or the crypto exchange facilitating the transaction.

It’s important to note that unlike stocks or mutual funds, you cannot offset crypto losses against gains. Each profitable crypto transaction is taxed independently at 30%.

How Is Cryptocurrency Taxed In India?

Here’s a detailed look at how various types of crypto transactions and income are taxed in India:

Tax On Crypto Gains

Any profits earned from selling crypto assets are taxed at a flat rate of 30% as per the new Section 115BBH of the Income Tax Act. This applies irrespective of the holding period, i.e. there is no concept of short-term or long-term capital gains for VDAs.

The cost of acquisition for calculating gains is simply the price at which you bought the crypto assets. If you received the crypto as a gift, airdrop, or reward, the cost of acquisition is considered zero.

For example, if you bought 100 XRP tokens at ₹50 each (cost of acquisition = ₹5000) and later sold them at ₹80 each (sale value = ₹8000), your taxable gain would be:

Sale Value – Cost of Acquisition

= ₹8000 – ₹5000

= ₹3000

30% tax on ₹3000 would be ₹900.

Tax On Airdrops

Airdrops refer to free tokens or coins distributed by crypto projects to their community. From a taxation perspective, airdrops are considered income and taxed at a flat 30% rate.

On What Amount Will The Airdrops Be Taxed?

Airdrops will be taxed at a flat rate of 30% on the fair market value of the tokens at the time of credit. Since your cost of acquisition for airdropped tokens is zero, the entire airdrop amount is taxable.

For example, if you received 1000 ABC tokens from an airdrop, and each token was trading at ₹10 at the time, your taxable income from the airdrop would be:

1000 tokens x ₹10 = ₹10,000

30% tax on ₹10,000 airdrop would be ₹3000.

Tax On Mining Cryptocurrency

Cryptocurrency mining refers to the process of validating transactions and minting new coins on proof-of-work blockchains like Bitcoin. Any coins received as mining rewards are taxed similar to airdrops at a 30% rate.

On What Amount Will Crypto Mining Be Taxed?

Mining income will be taxed at 30% on the fair market value of the mined coins at the time of credit to your wallet. The cost of mining equipment and electricity can be claimed as a deduction against the mining income.

For example, if you mined 0.1 BTC when the price of 1 BTC was ₹20 lakhs, your taxable mining income would be:

0.1 BTC x ₹20,00,000 = ₹2,00,000

If your mining equipment and electricity costs for the year were ₹50,000, your net taxable mining income would be:

₹2,00,000 – ₹50,000 = ₹1,50,000

30% tax on ₹1,50,000 mining income would be ₹45,000.

Tax On Crypto Staking/Forging

Staking refers to the process of locking up your crypto holdings to validate transactions and earn rewards on proof-of-stake blockchains like Ethereum 2.0, Cardano, Solana, etc. Forging is a similar concept used by some delegated proof-of-stake chains like Tezos.

Any staking or forging rewards earned are taxed at a flat 30% rate, similar to airdrops and mining. The cost of acquisition for staked tokens is considered zero for tax purposes.

Tax On Crypto Gifts

If you receive any cryptocurrency as a gift, it will be taxed in your hands at a flat rate of 30% on the fair market value as on the date of receipt. There is no tax exemption for crypto gifts, even from specified relatives.

For example, if you received a gift of 5 ETH when the price of 1 ETH was ₹1 lakh, your taxable gift income would be:

5 ETH x ₹1,00,000 = ₹5,00,000

30% tax on the ₹5,00,000 crypto gift would be ₹1,50,000.

Lost or stolen crypto in India

If you lose access to your cryptocurrency due to forgotten passwords, damaged hardware wallets, scams, or hacks, unfortunately there is no tax relief available under Indian Income Tax laws. The lost coins are still considered to be “transferred” and taxed at 30%.

This highlights the importance of securely storing your crypto assets using reliable hardware wallets like the Material Bitcoin Standard Version which is fire, water and shock resistant. Always maintain multiple backups of your wallet recovery phrase to avoid permanent loss of funds.

Loss From Crypto Transactions

Another important point to note is that losses from one crypto transaction cannot be set off against gains from another transaction. Each profitable trade is taxed independently at 30%.

For example, let’s say you made a profit of ₹1 lakh on Bitcoin but lost ₹80,000 on Ethereum in the same financial year. You would still need to pay 30% tax on the ₹1 lakh Bitcoin gain (₹30,000 tax), while the Ethereum loss cannot be adjusted against it for tax purposes.

Latest updates on crypto tax in India

Here are the key crypto tax developments in India over the last few years:

2024

• No major changes to crypto tax rules announced in the Union Budget 2024.
• TDS on crypto transactions continues at 1%.
• 30% tax on crypto gains and income remains unchanged.

2023

• 30% tax on crypto gains and income introduced in Budget 2023.
• 1% TDS on sale of virtual digital assets exceeding ₹10,000 in a financial year.
• Losses from one crypto transaction cannot be set off against gains from another.
• Crypto received as gifts taxed in the hands of the recipient.

2022

• Finance Bill 2022 defines virtual digital assets (VDA) and proposes taxation.
• 30% tax on transfer of VDAs proposed from FY 2022-23.
• 1% TDS on payments towards transfer of VDAs proposed from 1st July 2022.
• Gifting of VDAs to be taxed in the hands of the recipient.
• Losses from transfer of VDAs not allowed to be carried forward.

What is the 1% TDS on crypto assets?

From 1st July 2022, a buyer of virtual digital assets (cryptocurrency) is required to deduct a 1% TDS (tax deducted at source) on payments made to the seller if the total value of transactions exceeds ₹10,000 in a financial year.

The 1% TDS applies to the sale value, not just the gains. It is deducted at the time of payment by the buyer or the crypto exchange facilitating the transaction.

For example, if you sold Bitcoin worth ₹5 lakhs on a crypto exchange, a TDS of ₹5000 (1% of ₹5 lakhs) would be deducted by the exchange, even if your gain was only ₹50,000.

The purpose of this TDS provision is to establish a transaction trail and widen the tax base by bringing more people under the tax net. The 1% TDS can be claimed as a refund or adjusted against your total tax liability when filing your income tax returns.

What is a specified person?

The 1% TDS on crypto assets is required to be deducted by the following specified persons:

• An individual or HUF whose total sales/gross receipts/turnover from business exceeds ₹1 crore in case of business or ₹50 lakh in case of profession, during the financial year immediately preceding the financial year in which VDA is transferred
• An individual or HUF having income under the head “Profits and gains of business or profession”

If you do not fall under the above criteria, you are not required to deduct TDS on crypto transactions. However, the 30% tax on gains still applies.

New penalties for avoiding TDS

To ensure proper compliance with the new TDS provisions, the government has introduced stringent penalties for failure to deduct or pay TDS on virtual digital assets.

Section 271C: Penalty for failure to deduct 1% TDS

If a person fails to deduct the whole or any part of the TDS on crypto transactions, they will be liable to pay a penalty equal to the amount of TDS they failed to deduct.

For example, if you were required to deduct ₹10,000 as TDS but failed to do so, the penalty under Section 271C would be ₹10,000.

Section 276B: Failure to pay TDS to Government

If a person deducts the 1% TDS but fails to deposit it with the government within the prescribed time limit, they can face rigorous imprisonment of up to 7 years along with a fine.

Is any crypto tax free in India?

Unfortunately, there is no tax exemption for any kind of cryptocurrency income in India currently. Whether you earn from trading, investing, airdrops, mining, staking or gifts – a 30% tax applies across the board on the gains or fair market value.

This is in contrast to stocks or equity mutual funds, where long term capital gains up to ₹1 lakh in a financial year are exempt from tax. Hopefully in the future, the government may consider some tax relief for long term crypto investors as the industry matures.

Do you pay tax when you buy crypto in India?

Generally, you do not pay any tax at the time of buying or investing in cryptocurrency in India. The tax liability arises only when you sell or transfer the crypto assets. However, there are a few scenarios to consider:

Buying crypto with INR

If you buy cryptocurrency by paying INR from your bank account, there is no immediate tax implication. You will only be taxed when you later sell that crypto for a profit.

HODLing crypto

If you simply buy and hold cryptocurrency without selling, there is no tax liability. The unrealized gains in your crypto portfolio are not taxed until you actually sell and book the profits.

Trading crypto for crypto

If you trade one cryptocurrency for another, like buying Ethereum with Bitcoin, it is considered a taxable transfer. You need to calculate the fair market value of the crypto received and pay 30% tax on the gains, if any.

Buying crypto with stablecoins

If you buy crypto using stablecoins like USDT or USDC, it is treated similar to trading one crypto for another. The fair market value of the stablecoins spent would be considered for calculating any capital gains tax.

Do you pay tax when you sell cryptocurrency in India?

Yes, selling cryptocurrency for INR or exchanging one crypto for another are both taxable events as per the current Income Tax Act. Here’s how it works:

Selling crypto for fiat currency

When you sell crypto and receive INR or any other fiat currency in return, you need to pay 30% tax on the gains. The gain is calculated as the difference between the selling price and the cost of acquisition of the crypto asset.

For example, if you bought Bitcoin at ₹25 lakhs and sold it for ₹35 lakhs, your taxable gain would be ₹10 lakhs (₹35 lakhs – ₹25 lakhs). The tax payable would be 30% of ₹10 lakhs which is ₹3 lakhs.

Selling crypto for crypto

Trading one crypto asset for another is also considered a taxable transfer and attracts 30% tax on any gains. Here, the fair market value of the crypto asset received is considered as the selling price.

For example, let’s say you bought 1 Bitcoin for ₹30 lakhs. Later you exchanged that 1 Bitcoin for 15 Ethereum, when the price of 1 Ethereum was ₹2.5 lakhs. So the fair market value of 15 Ethereum received is ₹37.5 lakhs (15 x ₹2.5 lakhs).

Your taxable gain would be ₹7.5 lakhs (₹37.5 lakhs – ₹30 lakhs). 30% tax on this gain would be ₹2.25 lakhs, even though you didn’t receive any fiat money.

Do you pay tax when transferring crypto?

It depends on the type of transfer. Merely moving cryptocurrency between your own wallets or exchanges is not taxable, as there is no transfer of ownership. But gifting crypto to someone else is considered a taxable transfer, and any gains from a crypto trade must be reported. The recipient has to pay tax on the fair market value of the crypto received.

Moving crypto between wallets

If you transfer cryptocurrency from one wallet to another or from an exchange to your personal wallet, there is no tax implication as long as you own both the wallets. It is not considered a taxable transfer.

However, it is important to maintain proper records and documentation of such transfers for tax purposes. Using a reliable crypto tax calculator software can help you keep track of all your crypto transactions across wallets and exchanges.

Which Crypto Transactions Are Liable To Tax In India?

Here’s a quick summary of the common crypto transactions that attract income tax in India:

It’s important to note that every profitable crypto transaction is taxed separately and losses cannot be adjusted against gains.

Also, there is a 1% TDS on the sale value of crypto assets from 1st July 2022.

How To Calculate Tax On Crypto?

To calculate your crypto taxes accurately, you need to follow these steps:

1. Record all your crypto transactions including buying, selling, trading, airdrops, mining, staking etc. across all exchanges and wallets. Make sure to note the fair market value in INR at the time of each transaction.
2. For each selling transaction, identify the purchase cost of the crypto assets sold using the First-in-First-out (FIFO) method. This means the oldest coins are assumed to be sold first.
3. Calculate the capital gains for each transaction by subtracting the purchase cost from the selling price. Remember, losses cannot be adjusted against gains.
4. Aggregate all the profitable transactions and calculate 30% tax on the total gains.
5. Deduct any TDS already paid during the year from your total tax liability.
6. Pay any remaining tax and file your income tax returns declaring the crypto gains under the head “Income from other sources”.

You can use crypto tax calculator tools and software to automate this process and generate detailed tax reports. However, it’s advisable to consult a tax professional to ensure proper compliance.

When will you pay 30% tax on crypto in India?

The 30% tax on crypto gains is payable in the assessment year following the financial year in which the transactions took place. The financial year in India is from 1st April to 31st March.

For example, if you earned profits from crypto trading between 1st April 2022 to 31st March 2023, the gains would be taxable in the assessment year 2023-24. The due date to file your income tax returns for AY 2023-24 would be 31st July 2023 (or 31st October 2023 with audit).

It’s important to keep aside sufficient funds to pay your crypto tax liability in advance, as the 30% tax can be a significant amount eating into your profits.

Is there GST on cryptocurrency in India?

Currently, there is no clarity on whether GST (Goods and Services Tax) is applicable on cryptocurrency transactions in India. The GST Council is yet to take a final decision on this matter.

However, an 18% GST is levied on the transaction fees or commission charged by crypto exchanges for facilitating buying and selling. This GST is built into the fees and paid by the exchanges to the government.

Some experts believe that cryptocurrency should be treated as an intangible asset and attract GST on the transaction value. Others argue that crypto is more like actionable claims, which are not subject to GST.

The government is expected to provide more clarity on the GST aspect of cryptocurrencies in the near future. But for now, income tax remains the primary concern for crypto investors in India.

FAQ’s:

Is Bitcoin legal in India?

Yes, holding and transacting in Bitcoin or other cryptocurrencies is legal in India. The Supreme Court of India struck down the banking ban on crypto in March 2020, which was earlier imposed by the Reserve Bank of India.

However, cryptocurrencies are not considered legal tender in India. They are treated as virtual digital assets for income tax purposes.

Is India banning crypto?

No, India is not banning cryptocurrency. While the government had earlier indicated its intention to prohibit all private cryptocurrencies, the latest stance seems to be more supportive of regulating the industry rather than an outright ban.

The Finance Minister has stated that India will take a calibrated approach towards crypto regulation, taking into account the evolving technology and global best practices.

What’s the cryptocurrency bill in India?

The Indian government was expected to table a cryptocurrency bill in the Parliament to regulate the industry. However, the bill has been delayed and is still in the works.

The exact contents of the bill are not known yet, but it is likely to define cryptocurrencies, lay down a regulatory framework, and address issues like consumer protection, money laundering, and taxation.

The crypto industry is eagerly awaiting the bill for more clarity and legitimacy. The government has assured that it will take a balanced approach considering all stakeholders.

Will I pay Income Tax on cryptocurrency?

Yes, any income or gains from cryptocurrency transactions are subject to income tax in India as per the latest rules. A flat rate of 30% tax applies on the transfer of virtual digital assets, irrespective of your income tax slab.

Additionally, a 1% TDS (tax deducted at source) is also applicable on crypto transactions above a certain threshold from 1st July 2022.

Can I offset crypto losses against gains from crypto in India?

No, losses from one crypto transaction cannot be set off against gains from another transaction as per the current income tax provisions. Each profitable trade is taxed independently at a 30% rate.

This is different from the taxation of stocks or mutual funds, where short-term capital losses can be adjusted against short-term or long-term capital gains.

Can I claim crypto TDS?

Yes, the 1% TDS deducted on your crypto transactions can be claimed as a refund or adjusted against your total tax liability when filing your income tax returns.

The TDS is not an additional tax, but more of a prepayment of your tax liability. It is deducted by the exchanges or buyers and deposited with the government on your behalf.

Which India crypto exchanges deduct TDS?

All major Indian crypto exchanges like WazirX, CoinDCX, CoinSwitch Kuber, ZebPay, Unocoin etc. are required to deduct 1% TDS on crypto transactions above ₹10,000 in a financial year from 1st July 2022.

The exchanges have to deposit this TDS with the government and provide a TDS certificate (Form 16A) to the users. The users can then claim this TDS while filing their income tax returns.

How do I avoid tax on cryptocurrency in India?

Legally, there is no way to avoid paying tax on your cryptocurrency income in India. Willful attempts to evade crypto taxes can attract heavy penalties and even prosecution under the Income Tax Act.

The only way to minimize your crypto tax outgo is to plan your transactions smartly, harvest losses, and book profits in a phased manner. But you still have to pay the applicable taxes on the net gains.

It’s advisable to consult a tax professional who specializes in crypto to understand the legal ways to optimize your taxes. But trying to conceal or evade taxes on crypto can prove very costly.

Are cryptocurrencies a good investment?

Cryptocurrencies can be a good investment for those who understand the technology and the risks involved. They have the potential to generate high returns, but are also highly volatile and speculative in nature.

Investing in cryptocurrency requires thorough research, risk appetite, and a long-term perspective. It should not be done based on hype or fear of missing out (FOMO).

Ultimately, crypto should only form a small part of a well-diversified investment portfolio, not more than what you can afford to lose. Consult a financial advisor to assess your risk profile and investment goals before taking the plunge.

Will I be taxed if I give someone a Bitcoin?

Yes, gifting cryptocurrency to someone is a taxable transfer in the hands of the recipient. The recipient has to pay 30% tax on the fair market value of the crypto received as a gift.

There is no tax exemption for crypto received as a gift, even from specified relatives like parents, siblings, etc. This is different from the tax treatment of gifts in kind like gold or property.

Are Exemptions Available for Cryptocurrencies Transaction Profit?

No, there are no specific exemptions available for profits earned from cryptocurrency transactions in India. The entire gains are taxable at a flat rate of 30%, irrespective of the holding period or the quantum of profits.

This is unlike the taxation of stocks or equity mutual funds, where long-term capital gains up to ₹1 lakh in a financial year are exempt from tax.

Conclusion

Cryptocurrency taxation in India is still a complex and evolving topic. As an investor, it is crucial to understand the tax implications of your crypto transactions to avoid any legal troubles.

The key points to remember are:

• A flat 30% tax applies on gains from the transfer of virtual digital assets (cryptocurrency)
• A 1% TDS is deducted on crypto transactions above ₹10,000 in a financial year from 1st July 2022
• Losses from one crypto transaction cannot be set off against gains from another
• Airdrops, mining, staking, and crypto gifts are all taxable at 30% on the fair market value
• Detailed records of all crypto transactions must be maintained for tax purposes
• Consult a tax professional and use crypto tax calculator tools for accurate compliance

While the high tax rate of 30% may seem discouraging, it is a positive step towards legitimizing the crypto industry in India. Paying taxes on your crypto gains is not only a legal obligation but also a contribution towards the development of the nation.

As a responsible crypto investor, it is important to stay updated with the latest tax rules and regulations. Keep your crypto assets safe and secure using reliable hardware wallets like the Material Bitcoin Standard Version.

View cryptocurrency as an innovative technology, but understand the associated risks and tax consequences. Learn and follow the Indian rules for responsible participation.