Filing OF Tax on Cryptocurrency in India 2023

Cryptocurrency has recorded tremendously huge trading volumes over the last few years. 

This increasing popularity has drawn the attention of respective authorities. 

It has resulted in an amendment in the rules of taxation for virtual digital assets.

Since cryptocurrency is the most popular digital asset, it also comes under the same criterion. 

Finance minister Nirmala Sitharaman has announced a total of 30% tax on any income generated by the transfer of virtual digital assets in the Union Budget 2022. 

What is the new Taxation Framework for Crypto assets in 2023?

Before 2022, the crypto assets were not recognised officially by the government of India. 

Also, there was no instance of tax on cryptocurrency in india on the trading of cryptocurrencies. 

But recently, the authorities of India have acknowledged cryptocurrencies as Virtual Digital Assets (VDAs) for the first time ever. 

This resulted in the proposal of a new framework for the taxation of VDAs, including cryptocurrencies. 

The Income Tax Department has introduced article 47, section 2 in the Income Tax Act, to describe the VDAs.

 This detailed description includes all the crypto assets, NFTs, tokens, etc. 

Section 115BBH, introduced in the Union Budget of 2022, talks about the mandatory tax levied on the trading of cryptocurrencies. 

You need to pay a total of 30% tax (plus surcharges and a 4% cess) on all the profit generated by selling, spending or trading crypto assets from 1st April 2022. 

If you earn any other kind of additional income by staking or mining crypto assets, then you are subjected to pay income tax at an individual rate of tax. 

You need to pay the 30% tax under the Given following conditions-

1. For selling crypto in exchange for any fiat currency.
2. While trading the crypto assets.
3. While spending the crypto assets for the purpose of services and goods.

In some cases, you do not have to pay the mandatory 30% tax. However, the Income Tax Department may charge you an individual rate on receipt. Some corresponding cases are-

1. If you are a recipient while sending a gift in the form of crypto assets.
2. For staking rewards and mining the crypto coins.
3. For marketing methods like crypto Airdrops.

Furthermore, you will have to pay 1% TDS if the sale of the crypto assets exceeds 50k INR in a single financial year. Let’s explore this in detail.

What is TDS?

TDS stands for Tax Deducted at Source. This concept was established with the objective of collecting tax from each source of income. 

This specific amount to be deducted applies to all payments, such as salary, rent, commission, interest, fees, etc. 

TDS is 'deducted' by the 'deductor' from the tax payee, and then it is to be deposited to the income tax department on his/her behalf. 

In simple language,  the person making the payment deducts a specific amount for TDS. Then the person who receives the payment or income is liable to pay the tax. 

In accordance with the new taxation framework for Virtual Digital Assets, the TDS of 1% of the total amount must be levied on all the eligible transactions associated with VDAs or majorly crypto assets. 

The filiing of TDS is decided in accordance with section 194S of the Income Tax Act of India. 

The government of India has defined a certain limit beyond which the TDS will be charged as-

1. If the seller's PAN is unavailable, then the tax deducted at the source will be 20% of the total amount.
2. If you have yet to file the ITR of the previous year and the average of TCS and TCS for that year exceeds 50k INR, then you will be liable to pay the TDS of 5% of the total amount. 

The tax deducted at source (TDS) is regulated by the CBDT (Central Board of Direct Taxes) in India.

What conditions can attract TDS on the transfer of Cryptocurrencies (VDAs)?

The Central Board of Direct Taxes will charge TDS on the Virtual Digital Assets (crypto assets) in the given following conditions-

1. When an individual transfers the VDAs exceeding 50k INR in a given financial year.
2. When an individual other than the specified person transfers the VDAs exceeding 10k INR in a given financial year.

Now, let's understand who comes under a 'specified person' criteria.

1. Suppose you are a Hindu Undivided Family (HUF) or an individual and do not get any profitable gains from any profession or business. In this case, you are recognised as a 'specified person' by the tax laws associated with cryptocurrencies.
2.  Suppose you are an individual or HUF whose profitable gains from the total sales or business turnover do not exceed 1 crore INR. This should be true for the financial year preceding the year in which the transfer of Virtual Digital Assets took place.

In what Conditions is crypto Tax-Free in India?

Have you ever wondered if you can trade or transfer Bitcoin or any other cryptocurrencies free from taxes? 

There are certain instances when you do not have to pay tax on cryptocurrency in india. Some of them are-

1. You are not liable to pay any tax when you are transferring the assets between your own wallets.
2. If you hold the crypto assets in your digital wallets and do not make any transactions, then you do not have to pay any tax.
3. You can receive a gift of up to 50k INR from any of your close family members without worrying about taxes.

How does the Taxation work on Crypto gifts and donations?

When you receive gifts in the form of crypto, whether in the form of tokens, NFTs or coins, there is a certain framework of laws which charge you. 

The income tax department of India has proposed a tax slab rate according to the fair value of your gift. However, your gifts are not taxed on the receipt when-

1. The value is at most 50k INR in a single financial year.
2. The gift is received as a result of inheritance or marriage.

But, the mandatory taxation of 30% becomes applicable on gifts and donations when-

1. The amount exceeds Rs 50k in a financial year.
2. The donation is made via crypto to a ‘registered’ firm.

How does Taxation work on lost and stolen crypto in India?

The Income Tax Department of India needs to specify clear guidelines for the taxation of stolen or lost crypto assets. 

But, on the basis of various judgements in the court of law, we can state that there is no payable tax if you lose your crypto assets because of theft or hacking. 

However, because of strict rules and regulations associated with crypto gains, investors cannot claim to offset a loss due to hacking or theft.

How to calculate tax on cryptocurrency in india?

Now it is understood that you have to pay a 30% tax on the total profit you have earned. But how to calculate the profit generated? 

First of all, you should have a clear idea of your cost basics (it is nothing but the price at which you have bought the crypto assets based on the fair market value). 

The Income Tax Department has clearly stated that any extra fees related to buying or selling of the assets will not be included in the 'cost basis'.

Once you get an idea of the cost basis, you need to subtract your sale price from it. 

In some other conditions, if you have disposed of your crypto assets by trading or spending, then you need to subtract its fair value in INR from the cost basis. 

This value should be in accordance with the day your assets were disposed of. It is not calculated on the present market value.

How can you file crypto taxes with the Income Tax Department?

You can file crypto taxes with the Income Tax Department of India for the financial year 2022-23 by filling out the Income Tax Return forms ITR-2 and ITR-3. 

The ITR-2 reports for capital gains, and the ITR-3 accounts for the business income generated.

There is no need to attach proof or documents of holding the crypto assets while filing the Income Tax Return. 

However, you may need to present the physical copies of the documents if the Income Tax Department demands them for any clarification. 

Otherwise, you can apply for the Income Tax Return online without worrying about the attachments. 

Crypto assets are taxed according to the nature of their transactions and classifications. 

The provision of capital gains will be applicable if the crypto assets are categorised as investments. 

In the case of long-term investments (when you hold the crypto assets for >= 36 months), the tax applicable on the profit is 20% of the amount, along with indexation benefits.

By the Union Budget of 2022, the Finance Act has clearly stated that all the profit generated from the crypto assets must be recognised and subjected to a tax of 30%. 

This framework is in effect from 1st April 2022. Having temptations to avoid taxes? You must wonder if the Income Tax Department can track your crypto assets. 

The ITD ensures tax compliance with the help of KYC. Also, the 1% TDS has made it very easy for ITD to track individual transactions associated with VDAs or crypto assets. 

Evading taxes is a serious criminal offence in our country, and it can lead to penalties such as imprisonment and fines based on the severity of the situation.

Need a support system to track and manage your assets, real-time updates, and duly filing of ITR? Especia has been offering taxation, advisory, secretarial, and finance-related services for over a decade. Visit us now.

Conclusion

Cryptocurrencies are being traded at huge volumes today. Also, its recognition and new taxation framework have confined it to certain rules and regulations. 

Now, you are liable to pay taxes on the profit you have earned from trading or selling crypto assets. 

We have also discussed above in the blog the cases in which you are exempted from paying taxes. 

However, the mandatory tax applicable should be paid each fiscal year with the timely filing of ITR. 

Adhering to the new rules and regulations can invite troublesome situations for you. 

FAQ’s Related to tax on cryptocurrency in india 2023

1. What is the new taxation framework for crypto assets?

Cryptocurrencies are now classified as VDAs according to the new taxation framework proposed in the Union Budget 2022.

2. Am I liable to pay tax for stolen or lost crypto?

You do not have to pay tax for stolen or lost crypto assets if you can prove it in the ITD. However, the government needs to make clear specifications, so you cannot claim an offset in a court of law. Protecting your wallet key is beneficial to avoid circumstances.

3. How much tax do I have to pay for the profits generated in a fiscal year?

You must pay a mandatory 30% tax and 1% TDS (plus applicable surcharges).

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