Navigating Cryptocurrency Taxation in India became more challenging on April 1, 2022, with the introduction of a flat 30% tax on crypto sales. Despite this, resourceful individuals are devising innovative and legal strategies to reduce tax burdens while staying compliant. These approaches aim to optimize financial outcomes within the confines of the new tax regulations, offering investors a way to navigate the evolving landscape of cryptocurrency taxation in India.
Cryptocurrency Taxation in India
The Budget 2022 broadened the definition of virtual digital assets, encompassing all cryptocurrencies (e.g., Bitcoin, Ethereum) and non-fiat currencies (NFTs).
- Unified Tax Rate: Gains from Virtual Digital Assets, including cryptocurrencies, are subjected to a fixed 30% tax rate. This taxation falls under the category of ‘Other Sources,’ not Capital Gains.
- Loss Offsetting Restrictions: Losses from cryptocurrency sales cannot be offset by profits from any other income source, whether it’s business income or capital gains.
- No Inter-Crypto Offsetting: Offset between losses from one cryptocurrency and gains from another is not permitted. Each cryptocurrency transaction is treated independently.
- Carry Forward Limitations: Carrying forward losses from cryptocurrency dealings to subsequent years is not allowed, further limiting options for offsetting losses.
- Tax Calculation Complexity: Even if a trader makes a net profit after considering gains and losses, the tax is calculated on the total income, without allowing adjustments for cryptocurrency-related losses.
- Example Scenario: If a trader earns Rs. 500,000 in profit in May but incurs a Rs. 3 lakh loss in June, the taxable income remains Rs. 5 Lakhs, attracting a 30% tax.
- Offsetting with Other Income: On a positive note, profits from cryptocurrency can offset losses from other sources of income, providing some relief for taxpayers.
- Author’s Viewpoint: The author expresses dissatisfaction with this system, questioning the fairness of not allowing crypto traders to offset their gains and losses, in contrast to share market dealers who enjoy this privilege. The inconsistency raises concerns about fairness in Cryptocurrency Taxation in India.
1% TDS on Crypto Transactions in India
Starting April 1, 2022, a 1% Tax Deducted at Source (TDS) will be applicable to the sale of virtual digital assets, including NFTs and cryptocurrencies. This 1% TDS is mandatory under Section 194S and is deducted from the Sale Price, not the Capital Gain. However, individuals can claim credit for this TDS during the Income Tax Return (ITR) filing process, irrespective of whether the cryptocurrency was sold at a profit or loss. While this might affect working capital for active traders, it ensures that the government has comprehensive information to tackle tax evasion.
The author’s perspective emphasizes that many individuals traded cryptocurrencies without fulfilling their tax obligations. The introduction of TDS on such transactions aims to curb tax avoidance, providing the government with detailed insights into digital asset sales. This measure is a step towards ensuring compliance in the realm of Cryptocurrency Taxation in India.
Time of Tax Levy on Cryptocurrency
In the realm of Cryptocurrency Taxation in India, taxes are triggered when you sell your crypto assets, not when you withdraw funds from your bank account.
- Year of Sale Taxation: Even if you don’t withdraw the sale proceeds to your bank account, the tax obligation is still tied to the year in which the cryptocurrency is sold.
- Exchange of Cryptocurrencies: Exchanging one cryptocurrency for another is considered a sale and a bartering transaction, incurring tax responsibilities.
- Foreign Exchange Sales: The same tax rule applies even if the cryptocurrency is sold on a foreign exchange, emphasizing the global reach of the regulation.
- Applicability to All Residents: All individuals residing in India are subject to this regulation, ensuring uniformity in Cryptocurrency Taxation.
- Exemptions: Notably, NRIs, individuals with entities outside India, and those whose cryptocurrency is sold by foreign entities are exempt from this regulation.
GST on Cryptocurrency in India
There’s ongoing consideration in the Indian government regarding the inclusion of GST on cryptocurrency transactions. The proposal involves adding a 28% GST to these transactions, in addition to the existing 30% Tax. It’s worth noting that, as of now, this 28% GST on cryptocurrency transactions has not been officially implemented. Stay tuned for updates on the evolving landscape of Cryptocurrency Taxation in India.
Read also: 2-Factor Authentication in GST (2FA) – Important GSTN Advisory
How to Save Taxes on Crypto Transactions in 2024
Cryptocurrency Taxation in India comes with hefty taxes on virtual assets like cryptocurrencies and NFTs, where offsetting losses and costs is not allowed. This stringent rule applies to all Indian residents, except for NRIs and businesses registered outside India, who are exempt. To dodge these high taxes, many active Indian crypto traders are setting up entities in tax havens like Dubai, conducting business through foreign firms without incurring taxes in India.
Taking advantage of Section 6 of the Income Tax Act, even if the owners of the foreign entity reside in India, the Place of Effective Management Rules do not apply until the annual turnover exceeds Rs. 50 crores. This loophole enables individuals to establish corporations outside India, notably in Dubai, saving substantial taxes not only on cryptocurrency income but also on other commercial earnings. While other tax havens are viable, Dubai’s proximity and tax-free zones make it a preferred choice for Indian traders. Organizations often opt for Dubai’s tax-free zones, exempt from taxes, as opposed to the mainland where a 9% corporate tax will be enforced from 2024.
Conclusion
Cryptocurrency Taxation in India is complex but evolving. Strict rules mean heavy taxes for Indian residents on crypto transactions. While NRIs and foreign businesses have exemptions, some Indians look to tax havens like Dubai. As the regulatory landscape develops, staying informed is crucial for those dealing with Cryptocurrency Taxation in India.
Frequently Asked Questions (FAQ)
Cryptocurrency or crypto refers to a digital currency, such as Bitcoin, that is utilized as an alternative payment mechanism or speculative investment. Cryptocurrencies are named after the cryptographic algorithms that enable users to securely spend them without the need for a central authority or bank.
Bitcoin, possibly the best-known cryptocurrency, was the first successful example of a digital payment cryptocurrency. A payment cryptocurrency, as the name implies, serves not only as a medium of exchange, but also as a peer-to-peer electronic cash to expedite transactions.
In India, cryptocurrencies are classified as virtual digital assets (VDAs) and are taxed accordingly. The gains from cryptocurrency trading are taxed at 30%, plus an additional 4% cess under Section 115BBH.
Income from cryptocurrency and VDA transfers should be declared in ‘Schedule VDA’, ITR-2, or ITR-3. ITR-1 and ITR-4 cannot be used to report the same information. The ITR-2 is for persons who have capital gains from investing in VDAs but do not have any company income. Most cryptocurrency investors will choose ITR-2.