India announced plans to begin taxing income from digital assets earlier this year, while also setting out plans for the launch of its own digital currency. The government unveiled a tax of 30 percent on the sale of crypto assets in a move that brings more clarity to the regulation and tax treatment of cryptocurrencies following months of uncertainty about their legal status in the country. Budget 2022 has thus removed most of the FUD (Fear, Uncertainty, and Doubt) from the crypto sector.
In this post, I will answer some of the most important questions around crypto taxation in India.
Do note that this information is provided for educational purposes and is NOT legal or financial advice.
How will crypto profits be taxed?
The government has defined "virtual digital assets". The term has a broad definition and includes all types of crypto assets/ currencies such as:
- Ready money for example, Bitcoin (BTC)
- Open Blockchain Tokens, for example, Wrapped Asset Token (WRAP)
- Hush/ privacy coins, for example, Monero (XMR)
- Application coins, for example, Filecoin (FIL)
- Security tokens, for example, Exodus
- Non-Fungible Tokens (NFTs), for example, Crypto Kitties
- Algorithmic stablecoins, for example, Frax (FRAX)
- Governance tokens, for example, Uniswap (UNI)
- Public Blockchain natives, for example, Ether (ETH)
- Asset-backed tokens, for example, Tether (USDT)
- Lending / Borrowing cryptos, for example, Aave (AAVE)
A tax of 30 percent on the income from the transfer of "virtual digital assets" is applicable.
This tax is payable on your profit, which is calculated after deducting the "cost of acquisition" that could include the purchase price of the crypto and the gas, transaction fees.
Will free cryptos from airdrops, learn and earn schemes, and play-to-earn games be taxed?
Free crypto that you earn from airdrops, learn and earn schemes, and play-to-earn games will be considered as a gift. Under the existing income tax laws in India:
- Money received as gifts from relatives (such as a spouse, siblings) is not taxable.
- Money received as gifts from friends is taxable.
- If the amount of money gifted to you in a financial year is less than Rs. 50,000 then it will not be taxed.
- Money received as gifts on your marriage or under will/ inheritance is not taxable.
- Money received on your birthday, anniversary, etc. is taxable.
So depending on the above conditions, you may have to pay tax on these free cryptos.
Example: You have received 100 ABC crypto (worth Rs. 75,000) from a play-to-earn game. You may be liable to pay tax on this.
Will I be taxed even if I don't sell my crypto?
Yes and No.
Suppose you buy crypto and then don't sell it. Even if the value of your crypto goes up, you will not be taxed till you actually sell the crypto. So this may be good news for HODLers.
But if you get free crypto (from airdrops etc.) then you may have to pay gift tax on it even if you don't sell it. See Answer 2 above for details on this.
How will crypto mining be taxed?
Crypto miners may have to pay a 30 percent tax on their profits. They may be allowed to claim a deduction of the "cost of acquisition" — electricity costs, depreciation on mining computers, etc. Further clarity on this is awaited.
How will crypto staking and lending be taxed?
You may have to pay tax when you sell the crypto that you have earned from staking or lending. Further clarity on this is awaited.
Example: You have staked 100 ABC and received 5 ABC as a staking reward. You may not have to pay any tax. A few months later, you sell the 5 ABC for Rs. 10,000. Now, you may be liable to pay 30 percent tax on this Rs. 10,000 profit.
Will crypto exchanges deduct TDS?
For most transactions, crypto exchanges will have to deduct 1 percent TDS from July 1, 2022 onwards under the new section 194S of the Income Tax Act. This will ensure that all crypto transactions are recorded and reported to the government.
For the following people, this TDS may apply only if the total amount of crypto transactions is more than Rs. 50,000 in a year:
- Individuals or Hindu undivided families (HUF) with total business sales/ gross receipts/ turnover of more than Rs. 1 crore a year.
- Individual professionals with income over Rs. 50 lakh a year.
- Individuals or HUF who do not have any income from business or profession.
For others, this TDS may apply if the total amount of crypto transactions is more than Rs. 10,000 in a year.
Will salaries paid in crypto be taxed?
Yes. Your crypto salary may be subject to a 30 percent tax. And since no deductions will be allowed, taking crypto salaries may not be a good idea anymore.
Do I have to pay tax even if I use a decentralised exchange (DEX) like Uniswap?
A DEX like Uniswap will obviously not deduct any TDS. But you will still have to pay tax on your crypto profits. If you do not, then this is tax evasion carries heavy penalties when you get caught.
Do I have to pay tax even if I use a foreign crypto exchange like Binance?
Foreign crypto exchanges will not deduct any TDS. But you will still have to pay tax on your crypto profits. If you do not, then this is tax evasion and carries heavy penalties when you get caught.
Do I have to pay tax even if I use a peer-to-peer marketplace like LocalBitcoins?
Yes, you still have to pay tax on your crypto profits. If you do not, then this is tax evasion and carries heavy penalties when you get caught.
What if I gift crypto to a friend?
If it's your friend's wedding, then there is no gift tax payable. Otherwise, your friend may be liable to pay tax on these gifted cryptos. See Answer 2 above.
Rohas Nagpal is the author of the Future Money Playbook and Chief Blockchain Architect at the Wrapped Asset Project. He is also an amateur boxer and a retired hacker. You can follow him on LinkedIn.
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