As investors seek higher returns and diversify their portfolios, cryptocurrencies have emerged as a popular investment option, offering decentralised and border-less transactions. While digital asset can be legally traded, bought and sold in India, they are not recognised as legal tender.
Despite this distinction, investors who earn gains from cryptocurrency transactions are required to comply with the applicable tax and reporting rules. This means the profits are taxed at a prescribed rate and a tax resident must also report these gains while filing their(ITR).
How are crypto gains taxed in India?
Any income from the transfer of virtual digital assets such as cryptocurrencies and NFTs are taxed at a flat rate of 30% (plus 4% cess) irrespective of whether the income is treated as capital gains or business income. This tax rate applies to both short-term and long-term capital gains.
Additionally, a 1% TDS is also charged when a crypto asset is transferred, which refers to a change in ownership, not just a transfer from one wallet to another. The aim of charging a 1% TDS on transfers is to track purchases of and keeping a record of transaction details.
The following transaction undertaken using cryptocurrency is subjected to taxation under the income tax law:
- Using cryptocurrencies to buy goods or services.
- Exchanging cryptocurrencies for other cryptocurrencies
- Trading cryptocurrency using fiat currency such as INR
- Receiving cryptocurrency as payment for a service or as a gift.
- Mining cryptocurrency
- Staking crypto and earning stake benefits
- Receiving Airdrops
According to ClearTax, TDS on crypto transfers is no applicable if total sales during the year do not exceed ₹10,000. For individuals or Hindu undivided families (HUFs) with business turnover up to ₹1 crore ( ₹50 lakh for specified professions), this exemption threshold is ₹50,000 per financial year.
How are crypto gains reported in ITR?
If you have earned gains from selling your cryptocurrency holdings, then such an income must be disclosed under Schedule VDA while filing your ITR. The tax treatment and reporting requirements depend on the nature of the transaction and the type of income earned from the virtual digital asset.
- If the crypto units are held as an investment: Investor must report this income under ‘Capital gains’ head.
- If crypto is traded frequently: Investor must report this income under ‘Profits and Gains from Business or Profession’ head.
- If you received crypto as a gift: Recipient must report this income under ‘Income from Other Sources’ head.
You must noted that gifting of digital assets will attract tax in the hands of the receiver. Another key rule is that any loss arising from the sale of digital assets cannot be set-off against any other income, not even income from other digital currencies. This is a provision that is available to equities.
How to track investments?
Calculating tax on cryptocurrency can become complex for investors who have a large amount of transactions in different exchanges and wallets. In such cases, crypto bookkeeping software can help to manage your assets by consolidating transactions, automatically identifying activities such as deposits, withdrawals, trades and staking income, and generating reports for and holdings.
However, investors should still classify uncategorised entries and verify that their closing balances match their actual crypto holdings before finalising their tax calculations, according to ClearTax.