Virtual Digital Assets (VDAs) and Cryptocurrencies: Know the Differences
TO virtual digital asset (VDA) is any digital content that has been encrypted on the blockchain, allowing anyone to confirm its authenticity and determine who owns it.
Cryptocurrencies are one such type of digital asset, which can be used to pay for goods and services on online marketplaces. Cryptocurrency traders use the rise in value of the cryptocurrencies they invest in to earn large amounts of profit. However, high volatility and very high risk capital is an innate risk that comes with the high profitability of cryptocurrencies.
Today, there are more than 1,500 virtual currencies, including popular ones like Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, etc., that are traded on the digital currency market. Trading volume and investment in cryptocurrencies have increased exponentially in recent years.
Cryptocurrencies are digital currencies that are used primarily to purchase goods and services, similar to traditional currencies. However, the decentralized nature of cryptocurrencies, meaning that they operate without intermediaries such as banks, financial institutions, or central authorities, has made them controversial from the start.
Crypto Taxes: The Story So Far
For Indian investors trading virtual digital assets (VDAs) such as cryptocurrencies and NFTs, it is now mandatory to report their VDA income as capital gains if they are held as investments.
If the VDAs are held for business purposes, the income is considered business income. To make it easier to report VDA earnings, the Income Tax Return (ITR) forms for the 2022-23 tax year now have a dedicated section called Schedule โ Virtual Digital Assets (VDA). The last date to file the income tax return for the 2022-23 tax year is July 31, 2023, and a late return is accepted until December 31, 2023.
Regarding the outcome of the Union Budget 2022, the Indian government has officially categorized digital assets including crypto assets as VDA. Income from the transfer of VDAs such as cryptocurrencies and NFTs will be taxed at a rate of 30%.
The loss of VDAs cannot be offset by any other income. Additionally, gifting VDA will result in tax in the hands of the recipient. Finally, 1% TDS (Tax Deducted at Source) will be applied on all VDA sales transactions, including cryptocurrencies and NFTs, starting July 1, 2022.
The Indian government has classified cryptocurrencies and NFTs as "Virtual Digital Assets" and as such Section 2 (47A) has been added to the Income Tax Act to define this term. The definition of VDA is quite detailed, but includes any information, code, number, or token generated through cryptographic means that is not an Indian or foreign fiat currency. The official government position on VDAs, including cryptocurrencies, was clarified in the 2022 Budget.
In simple terms, VDAs for Indian taxation purposes cover all types of crypto assets including NFTs, tokens and cryptocurrencies but do not include gift cards or vouchers.
Timeline of Crypto Tax Evolution in India
2013: RBI warns investors against speculative investments, including cryptocurrencies.
2018 โ RBI restricts banking facilities to crypto exchanges, but Indian crypto market still growing.
2020 โ The Supreme Court of India strikes down the RBI order, allowing cryptocurrency trading without any regulatory framework.
2022: Union Budget 2022 introduces crypto tax regulations, including a 30% flat tax on cryptocurrencies and a 1% TDS on sales transactions.
This timeline shows how the Indian government's stance on cryptocurrency has evolved over the years, leading up to the current tax regulations in place.
How to calculate tax on cryptocurrencies
If you trade, sell or spend cryptocurrencies, you will be subject to a 30% tax on your earnings. Also, if you sell crypto assets worth more than Rs. 50,000/- (or Rs. 10,000/- in certain cases) in a single financial year, you will need to pay TDS tax of 1%.
Additionally, if you earn other cryptocurrency income, such as through staking or mining, you may also be required to pay income taxes based on your individual tax rate.
Section 115BBH of the Income Tax Act of 1961
In the 2022 budget, the finance minister introduced Section 115BBH. This section imposes a tax of 30% (with the applicable surcharge and the rate of 4%) on the profits obtained from the trading of cryptocurrencies as of April 1, 2022.
This rate is the same as the highest income tax rate in India (excluding surcharges and taxes). The tax rate applies to private investors, commercial traders, and anyone else who transfers crypto assets in a given tax year.
In addition to this, the 30% tax rate will be applicable regardless of the nature of the income, so it does not matter if it is investment or business income and there is no distinction between short-term and long-term gains. Therefore, trading, selling or exchanging cryptocurrency is taxable regardless.
Crypto-Tax Applicability
The crypto tax applies to all investors, whether private or commercial, who transfer digital assets within a given year. It is worth noting that the tax rate is the same for short-term and long-term gains and applies to all types of income, regardless of business/professional or other source income, earned by investors.
Tax responsibility on cryptocurrency transactions
The different types of cryptocurrency transactions that are subject to the 30% tax rate include spending cryptocurrency to purchase goods or services, exchanging cryptocurrency for other cryptocurrencies, and trading cryptocurrency with fiat currency such as โน (INR). However, please note that other transactions in the cryptocurrency lifecycle are subject to individual slab rates. These include receiving cryptocurrency as a gift, mining cryptocurrency, earning a salary in cryptocurrency, gambling in cryptocurrency, and making money from gambling based on cryptocurrency.
Tax deduction at source (TDS) in crypto transactions
The TDS rate for crypto transactions in India has been set at 1%, and from July 1, 2022, the buyer will be responsible for deducting TDS at this rate and paying the balance amount to the seller. In the case of P2P transactions, the buyer must deduct TDS and submit Form 26QE or 26Q, as applicable.
For crypto-to-crypto transactions, the TDS at a rate of 1% will apply to both the buyer and the seller. It is worth noting that TDS is automatically deducted by Indian exchanges while people trading on foreign exchanges need to manually deduct TDS and submit their TDS statements.
Failure to deduct tax at source will also result in an additional penalty that is generally imposed under Section 271C of the Income Tax Act of 1961. The provisions of Section 276B may also be invoked against the person concerned, if the taxpayer does not remit TDS to the Government. The prison sentence can be extended up to 7 years, along with a heavy fine.
Deductions Available to Crypto Tax Assessors
No deduction, other than acquisition cost, is allowed on income from the transfer of digital assets.
A gift of any VDA, such as Cryptocurrency, will attract tax in the hands of the recipient. In particular, losses from a virtual digital currency cannot be offset by income from another digital currency.
Cryptocurrency earnings reporting for tax purposes
To file taxes on your cryptocurrency for the 2022-23 tax year and 2023-24 assessment year, you can use either the ITR-2 form or the ITR-3 form, depending on whether you report it as capital gains or business income. The new ITR forms have a dedicated section called 'Schedule VDA' for reporting cryptocurrency earnings or income.
Gains from crypto transactions may be taxed as trading income or capital gains, depending on the intent of the investor and the nature of the transactions. If you make frequent trades and large volumes, the gains may be classified as trading income and you must use ITR-3 to report crypto gains.
However, if you hold cryptocurrency primarily for long-term value appreciation, the gains would be classified as capital gains and you would use ITR-2 to report cryptocurrency gains under standard income tax rules.
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