Income Tax on Cryptocurrency, NFT & VDA (Virtual Digital Asset)

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Sakshi Shah

cryptocurrency
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Tax on Cryptocurrency
Tax on NFT
Tax on VDA
Virtual Digital Asset
Last updated on May 27th, 2022

Under Budget 2022, the Finance Minister, Nirmala Sitharaman introduced a new Section 115BBH for tax on cryptocurrency and other VDA (Virtual Digital Assets) at a flat rate of 30%. Section 115BBH includes provisions for taxing income on VDA transfer, gifting, claiming of expenses, and treatment of loss. This section would be effective from 1st April 2022. Further, adding to the crypto news, the finance minister also introduced a new Section 194S for the deduction of TDS on the transfer of virtual digital assets.

Income Tax on Cryptocurrency and VDA under Section 115BBH of Income Tax Act

Section 115BBH of the Income Tax Act would be effective from 1st April 2022, to tax the income from virtual digital assets. Here are the crypto tax provisions.

Income Head for Crypto Tax

The Budget 2022 announcement did not have much clarity regarding the correct income head to classify the income from the transfer of VDA.

Transfer of Crypto as Income from Capital Gains

Income from the transfer of Virtual Digital Asset (VDA) should be classified under Capital Gains for the following reasons:

Transfer of Crypto as Income from Other Sources (IFOS)

Income from the transfer of Virtual Digital Asset (VDA) should be classified under IFOS for the following reasons:

However, the Income Tax Department has started sending out tax notices to taxpayers who traded in crypto in previous years but did not report such income in the ITR. Although there is not much clarity regarding the income head under which the taxpayer should report such income, the notice seems to consider it under the head Capital Gains. The Income Tax Department must clarify this by means of a circular.

Calculation of Capital Gain Tax on Cryptocurrency Transfer

To calculate capital gain on transfer of Virtual Digital Asset, consider the following:

  Particulars Amount
  Full Value of Consideration XXXX
Less Cost of Acquisition (XXXX)
  LTCG / STCG XXXX

Tax on Cryptocurrency – Treatment of Loss from transfer

Following are the restrictions on the treatment of set off and carry forward of losses on the transfer of cryptocurrency, NFTs, and other VDAs:

TDS on transfer of cryptocurrency and other VDA

Along with the provision of cryptocurrency taxes at 30%, the government also introduced Section 194S for the deduction of TDS on the transfer of cryptocurrency and other VDAs. As per Section 194S, the person responsible for making the payment on the transfer of a VDA must deduct TDS at the rate of 1% if the aggregate transfer amount during the financial year exceeds INR 10,000. The said limit is INR 50,000 in the case of specified persons.

Income Tax Notice for Crypto Traders

The Income Tax Department had sent out notices to multiple taxpayers for not reporting the crypto trading in the ITRs of the previous years. When a trader signs up on a crypto exchange, he must complete the e-KYC process. Using the data of PAN, Aadhaar or linked bank accounts from the compliances done by the crypto exchanges, the income tax department has the data of all your crypto trades.

The ITD sent out tax notices for crypto trading to taxpayers under Section 148A of the Income Tax Act. This notice was to conduct an inquiry to provide an opportunity before issuing notice for escapement of income under Section 148. The notice mentions the amount of crypto trading in a financial year and if the taxpayer did not report it as Capital Gains in the ITR of the relevant year. It provides the taxpayer an opportunity to provide an explanation by responding through emails.

The taxpayer must respond to the notice within the stipulated time. You can submit a response to the email as mentioned in the notice. You can also submit an online response under e-proceedings from your account on the income tax website with the justification and relevant proofs.

GST on Cryptocurrency, NFT, VDA

While Budget 2022 introduced the provision for income tax applicability on cryptocurrency, NFT, and VDA. However, there is no clarification yet for the applicability of GST on cryptocurrency, NFT, and VDA. Based on our interpretation of the GST Act, a virtual digital asset falls under the definition of goods. Thus, the sale of crypto and other digital assets is taxable under GST. Further, the services provided by crypto exchanges are also taxable under GST. However, a clarification is awaited from the GST Council on the applicability of GST on cryptocurrency and other digital assets.

FAQs

How is crypto trading taxed in India?

Income from the transfer of cryptocurrency, NFT, and other virtual digital assets is taxed at a flat rate of 30%. Further, the person responsible for making the payment on the transfer of cryptocurrency must deduct TDS at a rate of 1% under Section 194S.

What is the income head for reporting trading in cryptocurrency in India?

Cryptocurrency can be classified as any other capital asset as per Section 2(14) of the Income Tax Act. Thus, income from trading in cryptocurrency should be reported under the head ‘Capital Gains’ in the Income Tax Return. Further, the taxpayer cannot claim any expenses or allowances except the cost of acquisition against income from the transfer of cryptocurrency.

Can I set off loss from crypto trading against other incomes?

As per Section 115BBH of the Income Tax Act, here is the treatment of loss from transfer of cryptocurrency:
* Loss from transfer of cryptocurrency cannot be set off loss against any other income. It cannot be carried forward to future years.
* Loss under any other head of income cannot be set off against profit on transfer of cryptocurrency

How to calculate taxes on cryptocurrency trading?

Section 115BBH of the Income Tax Act lays down provisions for tax on cryptocurrency.
* Income on transfer of cryptocurrency is treated as Capital Gains and taxed at flat rate of 30%
* Capital Gains = Full Value of Consideration (Selling Price) – Cost of Acquisition (Purchase Price)

Got Questions? Ask Away!

  1. @Latesh_Bayad, there are two schools of thought for taxes on crypto, some believe it should be taxed as capital gains and others believe it should be considered as income from other sources.

    If the cryptocurrency is held as an Investment and being exchanged for Fiat Money it may be treated as capital gains.
    There are some articles which you might find useful

  2. Hey @Shama,

    The taxability of Cryptocurrencies arises under Income from Capital Gains if it is held as investment or trading. The cryptocurrency shall be considered as a Capital Asset and the taxability shall arise in the hands of person owning the same.
    In Your case, since, Person A is owner of the cryptocurrencies; so any gains arising from sale of cryptocurrencies shall be taxable in the hands of Person A as the data/KYC registered with exchange is that of Person A. It shall make no difference if the proceeds are received in Joint Savings A/c which is held along with Person B.
    Person B shall ignore the same proceeds in his ITR as Person A is paying the taxes in his ITR.

    Hope it helps!

  3. Budget 2022 brings taxes on Crypto, NFTs and other Virtual Digital Assets

  4. Hi @Murali_Krishnan_S, if you are receiving profits in India then you will be taxed at 30% + 4% HEC and if you are receiving profits outside of India, then they are not taxable in India. You can also go through the blog attached below which will help you how the new budget affects you crypto trading and profits. Let me know if you need any further clarification. :blush:

  5. Irrespective of my tax slab ; crypto is taxed @30% . ?

    I mean if my income is zero and i made profit from crypto trading Rs. 1 lakh ; i pay tax 30,000/= ? Or i’ll get STGC excemption of 1 lakh ?

    Or crypto is taxed 30% based on my tax slab ?

    In this case ; if my income is 5 lakhs including 1 lakh income from crypto trading ; i declare crypto income in first slab which is taxfree upto 2.50 lakh !

    What is the rule ?

  6. Hi @HIREiN,

    Unlike incomes such as salary, house property, capital gains from equity shares, mutual funds, ETFs etc. the basic exemption limit rule does not apply to income from Crypto, NFTs, and other virtual digital assets.
    Meaning, that even if your total income is below the basic exemption limit you will have to pay tax on your earnings from crypto.

  7. Hey @Rakesh_Sharma

    There is ambiguity on how to tax cryptocurrency since the Govt doesn’t consider Cryptocurrency as a legal tender. There are 2 schools of thought that discuss can be taxed under Income from Other Sources or Capital gains.

    To understand more about the taxability of Bitcoin, please refer to this article.

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