In India, cryptocurrencies are currently unregulated and do not have legal status, but they are not strictly illegal either. Use this article by MPVD & Associates tax advisory in Kolkata as a general starting point if you’re interested in investing in cryptocurrencies in India but are unsure about the country’s cryptocurrency tax regulations.
What is the legal status of cryptocurrency in India, and how can Indian citizens invest in it?
As of 2022, it is unclear how the government of India will handle cryptocurrency transactions because, despite being considered an asset, its tax classification is very different from other assets.
In 2018, the Supreme Court of India revoked the attempts of the Reserve Bank of India (RBI) to outlaw cryptocurrencies. The legal status of crypto has been in a “legal limbo” status since then.
This year, in the Union Budget of India 2022–23, Finance Minister Nirmala Sitharaman introduced two new tax rules on crypto assets to possibly shed some light on the obscurity. The rules came into effect in April and July this year and entail the following:
- TDS Rule on Cryptocurrency in India, 1 April 2022
The Indian Government has inserted Section 194S into the Income Tax Act to impose the Tax-Deducted-at-Source (TDS) Rule and, through the modified Finance Act 2022, with effect from April 1, 2022, cryptocurrencies will be classified as Virtual Digital Assets (VDAs).
Cryptocurrency traders must pay a flat 30% tax under the new crypto tax regulation on any revenue received through the transfer of cryptocurrencies and other virtual digital assets, including non-fungible tokens (NFTs). This will account for the taxation of profits and/or income from VDAs.
- Amended TDS Rule for Cryptocurrency in India, July 1, 2022
The new TDS rule came into effect on July 1, 2022. In addition to the earlier imposed 30% tax on investment profits, crypto traders must also pay a 1% tax deducted at source (TDS) on all considerations for the transfer of cryptocurrency, virtual digital assets (VDA) and non-fungible tokens (NFT) for transactions exceeding INR. 10,000. For “specified persons, any transaction exceeding INR. 50,000 is taxable.
The Indian legal system regarding VDAs is under development and the new tax regimes are subject to change and amendment. For the time being, Indian citizens who are looking to invest in or trade in cryptocurrencies, or VDAs, must stay away from off-market exchanges and stick to marketplaces that support the fair market value of the VDAs. Be aware of new tax laws and, ideally, speak with a professional tax consultant in India before beginning an endeavour.
Crypto assets are also classified as “other sources of income” when anyone fills out the ITR forms. Even though no clarification has been received from the income tax department, it is essential to report the gains in the ITR and pay taxes on them.
Cryptocurrency Tax Classification in India
Experts debate whether cryptocurrency and NFTs qualify as capital assets, currencies, securities, or something else in India. It is imperative to analyse each category to create a transparent and efficient tax system.
The Indian government has not specified how virtual asset classes (VDAs) should be valued, even though the imposition of tax in some circumstances is linked to the fair market value of the relevant asset. This uncertainty persists even though Budget 2022–23 attempts to shed some light on the virtual asset class.
Taxation Does Not Equal Legitimising Crypto In India.
One might think that since VDAs are taxed, they must be permitted or legal in India. But here is the biggest mistake. Even though cryptos get a classification, that is VDA, what is the classification of the VDA in the eyes of the Indian Government?
There are several illegal assets in India that are taxed. Assets obtained through criminal acts are taxed. Assets acquired illegally as unreported foreign holdings are taxed. So the mere presence of taxation hardly makes any difference in improving the legitimacy of VDAs.
Taxation On Profits From Crypto Investments That Are Classified As Capital Gains
While there are no tax regulations specified for the treatment of crypto-related transactions resulting in losses, the Goods and Services Tax (GST) applies to transactions that are business transactions. You’d be thrilled to know that many businesses accept bitcoin as a payment method, including restaurants and e-commerce sites! If you are a Shopify merchant, you too can accept Bitcoins for selling your products.
Picture This: You bought or received bitcoins or Ethereum as payment for the amount of 60,000 in May 2022, and sold the coins for 1,00,000 by December 2022. Your holding period for the crypto coins is less than 36 months. This is seen as a short-term capital gain. The tax rules would apply to the 40,000 you earned as taxable income, and this amount would fall into the income tax bracket.
Buying low and selling high is the basic investing approach for cryptocurrencies, a lot like how stocks or mutual fund units work. In this respect, cryptocurrency profits can be classified as capital gains and subject to capital gains tax. But what about business income? Or what to do when there are capital losses? That is still a big question.
How Does GST Work For Cryptocurrency-Based Business Income?
Indian citizens continue to invest in the rising cryptocurrency marketplaces despite the uncertainty and unstable legal status since it offers greater potential for quick money growth. Gains from selling cryptocurrency can be taxed as business income if traded frequently. However, there is no definite specification as to what happens in the case of losses.
GST may become applicable to the buying and selling of crypto tokens as a supply of goods or services.
- 18% GST is levied on any services provided through crypto exchanges as a financial service.
- A 28% GST would be levied on the entire value, a lot like how gambling and horse racing are taxed in India.
- Additionally, a 3% GST is imposed on gold-related crypto transactions.
The government needs a better classification of cryptocurrency as goods or services under the GST law, so that tax can be levied on the entire value of transactions. Experts recommend declaring crypto income because this is the only way to stay away from further complications and let the tax department decide what they want to do with the asset.
Investors need to exercise caution since taxing the profits from Bitcoin or Ethereum investments would present additional difficulties. Cryptocurrency doesn’t function like cash assets or other forms of capital gains; it’s unclear and open to quick changes in how the revenue would be taxed.
When Is A Specified Person Exempt From Crypto Tax?
When the total amount of consideration paid throughout the financial year is less than INR 50,000 and it is made by a “specified person”, then it is exempt from tax. Meanwhile, when the total value of the payment made by a non-specified person is less than INR 10,000, that person is also exempt from paying taxes.
Make Cryptocurrency Investments, Trading, And Taxation Simple And Secure With MPVD & Associates Tax Consultancy in Kolkata
Apart from our personalised advisory services, we have also developed insightful analyses and comprehensive instructions to give you step-by-step guidelines on crypto taxes in India.
Understand how the 1% TDS applies in addition to the 30% yearly tax on VDAs and things to consider to fulfil tax obligations for cryptocurrency investment, trading, and business income in India. Whether you are about to invest in crypto or have already been trading for quite some time, now is a good time to talk to us to get updated with the latest crypto tax situation in India.