Crypto investors in India are gearing up for the upcoming income tax return filing deadline. Crypto taxation is relatively new and can be challenging for investors. Nonetheless, in this era of innovation and technology, crypto traders can now take advantage of simplified crypto tax filing solutions introduced by many compliant exchanges in India. Prominent crypto exchanges in India have taken proactive steps to ensure tax compliance for their users and have forged partnerships with leading tax solution providers to automate the calculation of crypto tax obligations, catering specifically to the needs of Indian investors.

For starters, the Finance Act 2022 has been one of India’s first laws to recognize crypto assets, hence putting down tax on crypto in India. Following that, crypto assets have been categorized as “virtual digital assets” or VDA.

According to Section 115BBH of the Income Tax Act, 1961, any income from transfer of any VDA will be subject to income tax at a flat rate of 30%. A taxable event could thus be income arising from the following transactions among others:

• Conversion of any digital assets to Rs or any other fiat currency
• Conversion of one virtual digital asset type to another may include crypto-to-crypto trading or trading in stablecoins
• Paying for goods and services using a virtual digital asset

However, if you receive VDAs as part of your salary, it is considered as salary income and falls under the standard income tax slabs applicable to individual taxpayers and not under Section 115BBH as above. Interestingly, if you accrue any gains on transfer of such virtual digital assets in a subsequent transaction, that will qualify as a taxable event under Section 115BBH and will be subject to tax at a flat rate of 30%.

How is the 30% Crypto Tax calculated in India?
The flat income tax rate is applicable to retail investors, traders, or anyone transferring VDAs in a given financial year with no distinctions between short-term and long-term gains. The 30% tax rate is levied on any profits made from the transfer of VDAs. Further, any losses arising from sell of crypto assets are not allowed to be set off or carried forward.

Also, the 30 per cent crypto tax rate will remain the same irrespective of the nature of income i.e., it does not matter if it is an investment income or business income and is irrespective of the holding period. To understand further, let’s see below example:

Example:
If an investment of Rs 10,000 was made in crypto at the beginning of FY2022, and by the end of FY2022, the crypto was sold for Rs 15,000, a flat 30 per cent crypto tax is applicable on an income gain of Rs 5,000. As an investor, you will be liable to pay Rs 1,500 (plus surcharge and cess) as a tax on crypto income in that financial year.

It should be noted that any income arising on transactions relating to crypto shall be taxed only at the time of transfer of such crypto i.e., if a person continues to hold the asset, the holding is not taxable on such unrealized gains.

What is 1% TDS applicable on Virtual digital assets?
With effect from 01 July 2022, any transfer of virtual digital assets attracts TDS of 1%. This deduction is subject to threshold of Rs 10,000 and Rs 50,000 (for specified persons).

In case you are undertaking virtual digital exchange transaction on any crypto exchange in India, the crypto exchange shall be liable to undertake compliance of deducting TDS on every sell transaction and the user will have no liability in this regard. However, in case of Peer-to- Peer transactions ie two individuals transacting independently (without any intermediary), deducting TDS will be the liability of the buyer of virtual digital assets and non deduction of tax could lead to financial and criminal liabilities.

Is there any set off available of 1% TDS deducted on my sell transactions?
Yes, every crypto exchange or any other person who deducts 1% TDS of any user is liable to deposit it to the credit of the government under the PAN of such a user. Thus, the user will get credit of 1% TDS deduction for sell transactions and that credit can be offset against the 30% tax liability on income from virtual digital assets.

Is there a need to disclose my crypto transactions while filing income tax return?
Yes, the new Income Tax Return (ITR) forms for the FY 2022-23 now have a dedicated section called Schedule - Virtual Digital Assets (VDA) for reporting gains from crypto/NFTs and other VDAs. The last date for filing an income tax return (ITR) for FY 2022-23 is 31st July 2023. You need to diligently consolidate your crypto transactions across various exchanges or otherwise and report them while filing your income tax return.

Can you avoid 30% crypto tax in India?
While some Indian users have turned to foreign exchanges in an attempt to potentially avoid taxes, it is essential to note that there is no legal way to evade paying crypto taxes in India. Avoiding or evading crypto taxes can lead to severe consequences based on the extent of the offense. For instance, neglecting to deduct TDS from payments or failing to deposit the deducted TDS with the government carries repercussions. Individuals may face interest charges, penalties and also penal consequences for non-compliance in such cases.

Things Investors should note
Taxes on Gifts and Airdrops

If you receive crypto as a gift or through an airdrop, it is considered income and taxed at the flat rate of 30% (plus surcharge and cess) if the value exceeds Rs 50,000. Ensure that you report such transactions to avoid non-compliance.

Taxes on Mining and DeFi Transactions
Crypto mining income is considered business income and must be reported accordingly. Additionally, if you hold on to the mined crypto and later sell it at a profit, the gains are taxable at flat rate of 30%. DeFi transactions, such as yield farming and lending are not governed by Section 115BBH and tax on any income from these transactions shall be taxed as per regular tax slabs applicable to the user..

Taxes on NFTs
Non-Fungible Tokens (NFTs) are also classified as VDAs and are subject to the 30% tax rate on profits from their sale. Stay informed about any changes in tax regulations and comply with reporting requirements.

Seeking advice from experts and utilizing resources available on various credible platforms can facilitate a streamlined process. Staying updated on any changes in tax regulations is essential. By adhering to these guidelines, individuals can ensure transparency, legality, and peace of mind while engaging in crypto transactions within India.

(The writer is VP Finance & Tax, CoinDCX)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)