India has established a taxation system for cryptocurrencies and classed them as Virtual Digital Assets (VDAs). Cryptocurrency purchases, sales, and transactions are subject to a 30% capital gains tax on profits, as well as a 1% TDS tax on sales over ₹50,000 each year. All varieties of crypto assets, including cryptocurrencies, NFTs, and tokens, are included in VDAs. Individuals who receive additional income from mining or staking may also be required to pay income tax.
In some cases, such as when you give away cryptocurrency, mine coins, receive payment in cryptocurrency, receive staking rewards, or receive airdrops, you will only be subject to the individual tax rate. Nevertheless, you may be required to pay a 30% tax when selling, trading, or spending cryptocurrency. You might be responsible for paying the 30% tax on any earnings if you later sell, trade, or use these coins or tokens.
Let's say you purchased 1 Ether (ETH) on 1 June 2022 through WazirX for INR 130,000. You then transfer it to your non-custodial MetaMask Wallet. You hold it for a few months and then transfer it to CoinDCX and sell it on 1 Feb 2023 for INR 140,000.
To calculate the taxable amount, you first need to determine the gains that you made while transacting that asset. In this example you made a profit of INR 10,000 (i.e., INR 140,000 - INR 130,000). Please note here that transferring a crypto across exchanges or to your non-custodial wallet is not treated as a taxable transaction and hence does not attract any taxes.
Continuing the example
Taxable Amount = INR 10,000
Tax Liability = Taxable Amount * Tax Rate
INR 10,000 * 30% = INR 3,000
So, in this example, you would have a tax liability of INR 3,000 on your capital gain of INR 10,000 from the sale of Ether. Note that this calculation does take into account the TDS that needs to be levied on each transaction. We cover TDS later in this article.
DeFi transactions, such as receiving new tokens, referral bonuses, and play to earn revenue, may be subject to immediate individual taxation at the marginal rate, and tokens that are later sold or swapped may be subject to a 30% profit tax. Since the ITD has not made any specific instructions available, the Income Tax Act should be consulted for guidance.
As an example, suppose you purchased 200 MATIC for INR 16,000 through P2P marketplace on Binance. You then stake 100 MATIC for 5 months and receive 2 MATIC per month as reward i.e.10 MATIC in total. From a taxation standpoint this 10 MATIC is considered as income and will be taxed as your income slab.
To record transaction information and manage investments, crypto asset transfers in India now come with a 1% TDS tax requirement for sales, exchanges, or expenditures. From July 1, 2022, Indian exchanges, as well as buyers on P2P or international exchanges, must deduct TDS.
For designated persons with trading activity values under ₹50,000, no TDS is necessary. TDS on P2P or overseas exchanges must be paid, and those who must do so must submit Form 26QE within 30 days. Non- specified taxpayers are required to obtain a TAN, file Form 26Q on a quarterly basis, and pay TDS by the seventh day of the following month. Tax returns can be filed with a TDS credit claim.
Start by calculating your cost basis, which is the amount you paid for the cryptocurrency in INR and deduct it from the sale price or fair market value on the day you sold it to determine your earnings for tax reasons. You cannot increase your cost basis with the ITD. It is challenging to determine gains and losses for a variety of crypto assets since the cost basis approach chosen might have a big influence. The FIFO and average cost basis accounting methodologies are recognised in India.
Unless they are the subject of an audit, in which case the deadline is October 31, 2023, individuals in India must file their taxes for the most recent financial year (FY 2022-23) by July 31, 2023.
Individuals should use either the Income Tax Form ITR-2 (reporting as capital gains) or ITR-3 (reporting as business income) to file their crypto taxes in India for FY 2022-23 (AY 2023-24), and they should declare their earnings or income from crypto assets under the special section known as "Schedule VDA."