It is that time of the year when filing your income tax returns will be high up on your agenda, if not already done. The last date for ITR filing is July 31; so there is hardly any time left. Do note that from this year, people would also need to file taxes for gains made on their cryptocurrency investments.
In the Union Budget last year, it was announced that any income from the transfer of any virtual digital asset would be taxed at 30 per cent.
The crypto tax applies to all investors—private or commercial—who transfer virtual digital assets during the year. The tax rate is also the same for short-term and long-term gains, and it applies to all types of income earned by the investor, noted Avinash Polepally, senior director, crypto business head, Cleartax.
"Gains from trading, selling or swapping cryptocurrency will be taxed at flat 30 per cent (plus a 4 per cent surcharge) irrespective of whether the income is treated as capital gains or business income. Other than this tax, one per cent TDS will also apply on sale of crypto assets worth more than Rs 50,000," said Polepally.
The liability to deduct the TDS (tax deducted at source) at one per cent rate lies with the person purchasing the virtual digital assets from an Indian resident. If the seller has not filed the ITR, then TDS will be deducted at a higher rate of 5 per cent, according to Avinash Shekhar, CEO and founder of TaxNodes, a crypto tax startup.
The most common transaction on any exchange is where a person buys and sells any cryptocurrency to another person, essentially a transfer of the digital asset.
"Indian exchanges dealing with virtual digital assets are mandated to comply with TDS provisions. If an individual engages in a peer-to-peer transaction on an Indian exchange, the exchange itself will be responsible for deducting and depositing TDS with the government," said Shekhar.
What if someone is mining cryptocurrencies? Essentially, mining is a process where the person is generating new coins. According to Polepally, there should be no TDS implications on crypto exchanges in the case of mining.
"The cost of acquisition for crypto mining will be considered as zero for computing the gains at the time of sale. No expenses such as electricity cost or infra cost can be included in the cost of acquisition," he said.
Are there taxes on gifting cryptocurrency?
"Gifts of crypto are not taxed in the hands of the recipient if they are close relatives such as spouse, parents, children etc. However, if the recipient, in turn, sells the crypto, then they will incur a 30 per cent tax on the gains," said Raghuram Trikutam, CEO, Descrypt, a platform that allows investors to track and file taxes on cryptocurrency.
Gifting crypto to non-close relatives too will be tax-free in the hands of the recipient, but only up to Rs 50,000, added Trikutam.
Sometimes, blockchains or exchanges may send coins or tokens to wallet addresses for completing tasks, participating in community events, and the like. These are called Airdrops. According to Polepally, there should be no TDS implications on crypto exchanges in the case of airdrops. Tax implications on receiving donations in crypto will also be similar to airdrop.
"If you donate using cryptocurrency, then the value of the crypto at the time of donation will be considered as sale value and tax will be calculated on notional gains," he said.
What are the things that a crypto investor must keep in mind and remember to file?
One, the investor must maintain a detailed record of all crypto transactions, including purchases, sales and transfers. People should also differentiate income from various crypto activities, like trading, investment, and mining, among other things, as each is subject to different tax treatment, said Shekhar of TaxNodes.
"Understand the applicable tax rates for cryptocurrency gains based on the type of activity and duration of holding. If TDS is applicable, ensure proper reporting and compliance," he said.
According to Trikutam of Descrypt, investors have to disclose gains made on crypto transactions for each quarter of the financial year.
"Under schedule VDA, investors must list down all crypto transactions where they sold or exchanged any crypto, regardless of what they received in return (goods, services or other cryptocurrencies). This comprehensive disclosure is crucial for accurate reporting of crypto transactions," he said.
Do note that income can't be offset by losses and losses can't be carried forward to subsequent financial years.