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Do crypto taxes intimidate you as a new crypto investor? Don’t worry, you're not alone. Despite facing some of the highest taxes in the world, millions of Indian investors continue to invest in Crypto. But with the Income Tax Department's (ITD) increasing scrutiny of Bitcoin and other cryptocurrencies, it's essential to understand how India's crypto tax laws work. That's why we've put together the ultimate crypto tax guide for 2023 to help you navigate the world of crypto taxes and stay compliant with the ITD.
From understanding the tax implications of buying and selling cryptocurrencies to filing your tax returns, our guide covers everything you need to know about crypto taxation in India. So, sit back, relax, and let us guide you through the ins and outs of crypto tax in India.
15th June, 2023 - Updated to accommodate ICO, Gifts and Donation Taxes
15th June, 2023 - Updated to accommodate DAO taxes
15th June, 2023 - Updated to accommodate the new circular on TDS
The Indian government did not have a definitive stance on classifying Crypto or imposing taxes on them before 2022. However, during the 2022 Budget session, Finance Minister Nirmala Sitaraman introduced Section 2(47A) into the Income Tax Act, which defines Virtual Digital Assets (VDAs) in detail and covers all types of crypto assets, including cryptocurrencies, NFTs, tokens, and others. You have to pay a 30% (plus applicable surcharge and 4% cess) tax rate on any profits incurred from crypto transactions.
According to the ITD, if you have disposed of Crypto (sold Crypto or traded it for another crypto) or earned Crypto (received Crypto through airdrop or staking rewards), you must pay crypto taxes in India. Unlike other asset classes, there is no tax benefit to holding Crypto for the long term. You must pay taxes on crypto income regardless of how long you hold it.
Moreover, you may now have to face an additional Tax at Source (TDS) under section 194S of Section 2(47A) on transferring crypto assets on or after July 1, 2022.
Consider the following transactions:
02/01/22 - Ravi bought 3 BTC for ₹25,00,000 each
12/02/22 - Ravi bought 2 ETH for ₹1,50,000 each
15/05/22 - Ravi sells 3 BTC for ₹30,00,000 each
23/06/22 - Ravi sells 2 ETH for ₹2,00,000 each
Now as seen in the above ledger of transactions, two disposals were made. So let’s look at the gains incurred from each disposal individually.
3 BTC sold for ₹30,00,000 each
These BTC tokens were acquired for ₹25,00,000 each.
Cost Basis = ₹25,00,000
Disposal Amount = ₹30,00,000
Capital gain/loss = Disposal Amount - Cost Basis = ₹30,00,000 - ₹25,00,000 = ₹5,00,000(for 1 BTC token)
Total Gain from 3 BTC tokens = 3*5,00,000 = ₹15,00,000
2 ETH sold for ₹2,00,000 each
These tokens were acquired for ₹1,50,000 each.
Cost Basis = ₹1,50,000
Disposal Amount = ₹2,00,000
Capital Gain/loss = Disposal Amount - Cost Basis = ₹2,00,000 - ₹1,50,000 = ₹50,000(for 1 ETH)
Total Gain for 2 ETH tokens = 2*50,000 = ₹1,00,000
Collective gain from both disposals = ₹15,00,000 + ₹1,00,000 = ₹16,00,000
Now these gains will be taxed at a flat 30% tax rate, not including the cess and surcharge.
If you are considering avoiding reporting some of your transactions on your tax return to the Income Tax Department (ITD), the answer is a resounding no. The ITD has complete access to your records and can easily cross-check your tax report with their database to identify discrepancies.
In India, the ITD keeps track of crypto-related transactions, including the number of crypto assets held in wallets and exchanges, by implementing Know-Your-Customer (KYC) policies. Local exchanges in India are also required to comply with this policy.
Additionally, various global initiatives require private companies to share their customers' data with tax authorities worldwide to combat criminal activities such as money laundering. Using blockchain analytics tools, tax authorities can trace the movement of crypto assets between exchanges and wallets, providing insight into Indian taxpayers' private crypto holdings.
The ITD did not mention any term like "capital gain tax" in their official notification. Instead, they have implemented a flat income tax rate for all retail investors, traders, or individuals who transfer crypto assets in a particular financial year without differentiating between short-term and long-term gains. If you engage in any of the following transactions, you may be subject to a flat tax rate.
You must pay a 30% (plus applicable surcharge and 4% cess) tax rate on any profits made from the above-mentioned transactions. The 30% crypto tax rate will be the same irrespective of the nature of income i.e., it does not matter if it is an investment or business income and is irrespective of the holding period.
While you'll pay a flat 30% tax on your profits, determining your cost basis is the first step in figuring out how much you owe.
To calculate capital gains, you'll need to know the sales price (proceeds) and purchase price (cost basis) of the Crypto you sold or transferred. For instance, if you sell ETH for ₹ 2,00,000, your sales price or proceeds is ₹ 2,00,000.
The formula for calculating capital gains is straightforward: selling price minus purchase price equals capital gains.
However, determining your purchase price can be more complicated if you bought the cryptocurrency multiple times. In this case, you'll need to determine which units were sold first. In India, you can use the First-in First-out (FIFO) accounting method as it is advised by ITD, which means that the earliest acquired units are sold first.
Let's say you invested INR 80,000 in Crypto in FY2023 and sold the Crypto for INR 1,20,000, resulting in a profit of INR 40,000. Now as an investor, you’re subject to a flat 30% crypto tax, you must pay INR 12,000 (plus surcharge and cess) as a tax on the crypto income for that fiscal year.
Please note: If you buy or sell Crypto, you'll only be taxed on the income or profit you make during the transaction. So if you hold onto your Crypto and its value goes up, you will only have to pay taxes on those unrealized gains once you decide to sell it.
Transaction 1: You bought Bitcoin for INR 3 Lakhs and sold it for INR 4 Lakhs.
Transaction 2: You bought Litecoin for INR 1.5 Lakhs and sold it for INR 1 Lakh.
After calculating your gains and losses from both transactions, your net income from the above transactions is INR 1 Lakhs, the profit earned from the Bitcoin transaction.
For FY 2022-23, the applicable tax rate for profit is 30%. So, you'll owe INR 30,000 (plus surcharge and cess) as a tax on your crypto profit.
Crypto losses aren't tax-deductible in India according to clause 115BBH of Section 2(47A which states that losses incurred from the transfer or sale of crypto assets cannot be used to offset any other income.
Let's say you incur a net loss of Rs 2 Lacs from selling Crypto during the year, your tax liability for crypto transfer will be zero for the current year.
However, this loss of Rs 2 Lacs cannot be carried forward to the next financial year and used to offset future income. Essentially, the loss of Rs 2 Lacs will not benefit you in future tax periods when generating taxable income from the crypto business.
While the ITD has not offered clear guidance on lost or stolen crypto assets, we have analyzed past judgments on issues of losses or theft of other assets. Our analysis shows that you are not required to pay taxes on lost or stolen crypto assets.
However, due to the ITD's strict stance on offsetting crypto losses against gains, you cannot offset losses from lost or stolen crypto assets against any gains.
The examples we’ve used so far to explain capital gains and crypto income calculations are fairly simplistic and do not represent real-world transactions. Transactions in the real world involve multiple assets of the same kind acquired on different dates and prices, making the overall process more complicated.
This highlights the need for a well-defined method to calculate crypto gains and losses, which are called accounting methods. Each country specifies a convenient accounting method to maintain homogeneity across all capital gains calculations.
The ITD in India recognizes the FIFO (First-In-First-Out) accounting method for cost-basis calculations. The FIFO accounting method states that the first asset you buy is the first asset you sell.
This can be better understood with an example:
Consider the following set of transactions-
10/01/22 - Sahil buys 1 BTC for ₹20,00,000
13/03/22 - Sahil buys 1 BTC for ₹22,00,000
17/05/22 - Sahil buys 1 BTC for ₹25,00,000
23/06/22 - Sahil sells 1 BTC for ₹30,00,000
If we consider the FIFO accounting method to calculate the cost basis for this disposal,
The disposed of BTC was acquired on 10/01/22 for ₹20,00,000
Cost Basis = ₹20,00,000
Disposal Amount = ₹30,00,000
Capital Gain/loss = Disposal Amount - Cost Basis = ₹30,00,000 - ₹20,00,000 = ₹10,00,000
Who wouldn't want to find ways to save some extra money? Well, we certainly do, and that's why we've got some practical strategies to help you avoid paying taxes on crypto investments in India.
1. Indirect exposure to Crypto
Gaining exposure to a particular digital currency through indirect means can be an effective way to save on crypto tax. Global investment platforms have recently launched portfolios that allow Indian crypto investors to obtain exposure to a digital currency without buying or investing in it.
Investing in a fund that tracks the price of a particular crypto, like the Grayscale Bitcoin Trust, can provide indirect exposure to Bitcoin without directly buying it. This can help save on taxes and provide diversification.
2. Using stablecoins for gains
Stablecoins pegged to a different currency, are less volatile than cryptocurrencies like Bitcoin or Ethereum. Using stablecoins can help secure investments in the long run and save on taxes in India.
3. Taking advantage of a low-income year
The taxation rate on profits from crypto sales is calculated based on taxable income. Selling crypto assets in a low-income year can result in a lower income tax rate, and waiting for 12 months can further reduce the tax rate for crypto assets as per long-term capital gain rates.
Let's say you expect to earn less than usual this year due to a job loss or sabbatical. Selling crypto assets in a low-income year can result in a lower tax rate, and waiting for more than a year to sell can further reduce the tax rate for crypto assets.
4. Tax-loss harvesting
Selling crypto assets at a loss intentionally to claim tax savings can be an effective strategy. This way, the 30% tax only applies to the gains incurred by the crypto assets.
Let's say you bought 1 BTC for INR 10,000, that is now worth INR 8,000. Instead of holding onto it, you can sell it to claim a tax loss of INR 2,000 and offset gains from other investments.
However, it’s still unclear whether tax-loss harvesting works in India with the latest rules and regulations passed by the ITD. We suggest seeking help from an experienced tax professional to avoid complications.
According to section 194S of the Income Tax Act 1961, a 1% TDS is levied on any consideration paid for transferring Virtual Digital Assets. Essentially, when you sell Crypto on a crypto exchange, the exchange must deduct and withhold 1% of the transaction value as TDS, which is then paid to the government. However, as per Income Tax regulations, TDS may not be applicable if your transactions (both buy and sell) are below ₹10,000.
For instance, if you sell Bitcoin worth ₹20,000, the 1% TDS would be deducted from the sale amount, which amounts to approximately ₹200 in this example. The crypto exchange will directly deduct this amount from your balance.
It's important to note that in the case of crypto-to-crypto trades, TDS will be applied to both the buyer and seller at a rate of 1%.
In addition to taxes on profits, you may have to pay income tax if you engage in the following activities:
In India, taxpayers can choose between the old tax regime and the new regime, which has lower tax rates. However, some exemptions and deductions available in the old regime are not applicable in the new regime.
Assuming you choose the new tax regime, you will be taxed on your total income at rates ranging from 0% to 30%. India has a progressive tax rate system, meaning different tax rates apply to different tax slabs. You need to calculate the applicable tax rate only for the amount that falls into each tax slab, rather than applying the same rate to your entire income.
For the Assessment Year 2022-23, the personal income tax rates for the new tax regime are as follows:
The tax rates from the previous tax regime are as follows:
Calculating your crypto income is a pretty straightforward process; all you need to do is add all your gains together, giving you your taxable income base.
Wondering if there are non-taxable activities in India? Yes, there are a few instances where you don’t have to pay any taxes in India. Let’s have a look at these events.
The following activities are taxable events in India. You have to pay taxes if you get involved in any of these activities.
The ITD still needs to specify how they will tax rewards received from crypto mining. Neither have there been any prior statements or guidance on this matter. This creates uncertainty on how the Indian government or ITD intends to tax crypto mining rewards.
Until official guidance is provided, it is reasonable to anticipate that mining rewards in India will be taxed as regular income upon receipt. This implies being subject to progressive income tax rates instead of a flat 30% rate. Moreover, if you later sell, swap, or use the mined coins and generate a profit, you may be liable for a 30% tax on that profit.
The ITD has not provided specific guidelines on taxing staking rewards in India. However, assuming that gains from staking in a Proof-of-Stake (POS) consensus mechanism will be treated as income and the received assets taxed upon receipt is reasonable.
These assets will be taxed based on their fair market value (FMV) at the time of receipt. Additionally, a 30% tax may apply when you choose to dispose of these tokens in the future.
The ITD has not provided any definitive instructions on the taxation of crypto margin trading, futures, and CFDs. We will revise and supplement this guide as soon as the ITD releases an official guideline.
Let's delve into the tax implications of NFTs under the new tax laws. NFTs, categorized as Virtual Digital Assets, are subject to taxation in India. If you profit from the sale of an NFT, you will be liable for taxes, surcharges, and cess. Minting NFTs is not currently specified as a taxable event by the ITD.
However, if you sell or exchange an NFT for fiat currency or cryptocurrency, a flat 30% tax may apply based on taxation models similar to India.
Gifting Crypto in India is a taxable event. However, there are a few exceptions:
To qualify for a tax deduction on donations to charitable institutions in India, it is necessary to donate through official banking channels or in cash up to RS2,000. Since cryptocurrencies are not recognized as legal tender in India, any donations made in Crypto will not be eligible for tax deductions. However, your generous contribution in the form of cryptocurrency may be considered as the disposal of an asset, potentially subjecting any perceived profits to a 30% tax.
The ITD has yet to issue any detailed guidance on DeFi transactions. Therefore, we must rely on the existing provisions of the Income Tax Act for direction. You may be taxed at your Tax Rate for the following DeFi transactions:
Even though you have paid tax upon receipt, it is essential to remember that you may still be liable for a 30% tax on any profits made if you sell, swap, or spend those tokens later.
The ITD is yet to release any guidance on how income from ICOs is taxed. ICOs are special events that allow investors to own project native tokens before the project's release. They are similar to IPOs; you can trade mainstream tokens like BTC and ETH to receive project-native tokens in exchange. Since all income is taxed under the umbrella tax rate of 30%, income from ICOs will most likely be taxed under the same rate.
However, we suggest seeking guidance from an experienced tax professional regarding the taxation of such tokens to avoid legal complications in the future.
The taxation of income from DAOs in India currently needs more clear guidance. We are actively monitoring for any new guidelines on this matter. We will update this information as soon as relevant details emerge to provide you with the latest insights.
Regarding hard forks, receiving new tokens resulting from a fork will be subjected to Income Tax at an individual rate. The tax rate will be based on the fair market value of the tokens in INR at the time of receipt. Additionally, if you later decide to sell, swap, or spend your tokens, you'll have to pay a 30% tax on any profit made from the transaction.
On the other hand, airdrops are considered a gift, and you may be able to claim tax exemption if the total value of airdrops and gifts is up to INR 50,000 in a year. However, if the value exceeds INR 50,000, you'll have to pay Income Tax at your rate based on the fair market value of the token received at the time of receipt.
There are two significant periods in India when filing your crypto taxes. The first is the financial year (FY), which aligns with the fiscal year that runs from April 1 to March 31 of the following year. The second is the assessment year (AY), the period during which you're required to report and pay your taxes for the previous financial year.
For example, the most recent financial year took place between April 1, 2021, and March 31, 2022, commonly referred to as FY 2021-22. Similarly, the current assessment year for the previous financial year is often known as AY 2022-23.
If you're reporting your crypto taxes as part of the AY 2022-23, the tax deadline is July 31st, 2023. However, if you're under a tax audit for the previous FY, the deadline is pushed back to October 31st, 2023. It's crucial to keep track of these deadlines and file your taxes on time to avoid penalties and interest charges.
Filing crypto taxes in India can be a complex process, especially if you are unfamiliar with tax laws and regulations.
In India, you have two options to file crypto tax - ITR-2 for reporting capital gain tax and ITR-3 for reporting business income tax. So we’re providing you with a detailed process to report crypto taxes on both options.
Step 1: Gather all the necessary documents related to your crypto transactions, such as the purchase and sale receipts, crypto wallet details, and other transaction records. Also, calculate all your crypto gains and incomes.
Step 2: In ITR-2, under the ‘Capital Gains’ section, enter the details of your crypto transactions, including the purchase and sale date, the type of Crypto, the quantity, the purchase price, and the sale price. And finally, enter capital gains in the appropriate fields.
Step 3: If you are reporting your crypto income as business income, use ITR-3, and enter the details of your business income in the ‘Profit and Loss’ section. Ensure to include all the expenses related to your crypto transactions, such as exchange fees, transaction fees, and other expenses.
Step 4: Once you have entered all the necessary information, calculate your tax liability and pay any taxes due. You can pay your taxes online through the Income Tax Department’s website or by visiting your bank branch.
Step 5: Finally, file your income tax return online through the Income Tax Department’s website. Save a copy of your tax return and all the supporting documents for future reference.
It is always recommended to seek professional help from a tax consultant or a CA or use an online crypto tax portal like Kryptos if you are unsure about any steps in filing your crypto taxes.
Now that you’re aware of how your crypto transactions are taxed and what forms you need to fill out to complete your tax report, here’s a step-wise breakdown of how Kryptos can make this task easier for you:
If you need clarification regarding the integrations or generating your tax reports, you refer to our video guide here.
The ITD, like many tax authorities worldwide, requires you to maintain detailed records from past years. You are expected to keep the following records in India:
There is no legal way to avoid crypto taxes entirely, but there are strategies you can employ to lower your tax bill:
One effective strategy to save on crypto taxes in India is indirectly gaining exposure to digital currencies. This can be achieved through global investment platforms that offer portfolios tracking the price of specific cryptocurrencies.
Stablecoins, which are cryptocurrencies pegged to the value of a different currency, offer a less volatile alternative to cryptocurrencies like Bitcoin or Ethereum. By using stablecoins for investments, individuals can mitigate risks associated with price fluctuations and achieve more stability in the long run. Additionally, stablecoins can help save on taxes in India as they are often treated differently from other cryptocurrencies regarding tax regulations.
The tax rate on crypto profits in India is calculated based on an individual's taxable income. Therefore, selling crypto assets in a year with a lower income can result in a lower tax rate. Furthermore, holding the assets for more than 12 months can qualify for long-term capital gain rates, which offer even more favourable tax treatment.
Tax-loss harvesting involves intentionally selling crypto assets at a loss to offset gains from other investments and claim tax savings. Individuals can deduct losses from their taxable income by realizing losses on certain crypto assets, effectively reducing their overall tax burden.
1. Is Crypto legal in India?
Yes, Crypto is legal in India and is considered a "Virtual Digital Asset (VAD)" rather than a currency by the IITD. As such, Crypto is subject to taxation following specific guidelines issued by ITD, which include different tax rules and regulations.
2. How to Calculate and File Your Crypto Taxes in India Using Kryptos?
Filing your crypto taxes alone can be difficult, and it's important to ensure you don't miss reporting any transactions that could lead to legal trouble. Kryptos offers a smart software-based solution for crypto taxation. It can quickly generate a legally compliant tax report by auto-fetching your transactions. This means you can relax on your couch while Kryptos takes care of everything.
3. How is receiving Crypto as a gift tax in India?
To determine whether you need to pay tax on gifted Crypto, two primary factors come into play: the value of the gift and your relationship with the person who gave it to you.
Any gifts received in the same tax year valued below ₹ 50,000 are tax-free in India. However, gifts valued above this limit are taxed based on your ordinary income tax rates, up to 30%. But, it's unclear whether crypto gifts are taxed as ordinary income or according to the 30% flat income tax rate.
A gift from a direct family member, like your parents or grandparents, is considered tax-free, regardless of the value. Although there is no specific mention of crypto gifts by the ITD guidelines, it's reasonable to assume that the tax-free gift law applies to Crypto as well, as it stands today.
4. How is Staking Taxed in India?
The ITD has not provided any guidelines on the tax consequences of staking rewards. However, suppose you are engaging in staking as a participant in a PoS consensus mechanism. In that case, you will probably be required to pay Income Tax at your tax rate on the fair market value of the received tokens in INR on the day of receipt. Furthermore, you'll be accountable for a 30% tax on any earnings realized when you eventually sell, swap, or use your staking rewards.
All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!