Tax on gifting Crypto, NFT, VDA in India

In India, cryptocurrency is defined as a Virtual Digital Asset i.e. VDA. Under Budget 2022, the finance minister announced the provisions for taxation on cryptocurrency, NFT (non-Fungible Token), and other VDA (Virtual Digital Asset). Further, they also introduced provisions for tax on gifting crypto, NFTs, etc. As per the Income Tax Act, gift of cryptocurrency, NFTs, etc shall be taxable in the hands of the recipient.

Forms of Gifting Crypto

A crypto trader or investor can gift cryptocurrency through the cryptocurrency exchange using gift cards, crypto paper wallet, crypto token, etc.

  • Crypto Gift Cards – Crypto traders can buy gift cards from the cryptocurrency exchange for the purpose of gifting them to friends and relatives.
  • Crypto Paper Wallet – A crypto trader can also gift a crypto paper wallet i.e. a piece of paper with a single private key and bitcoin address.
  • A Crypto Token – A crypto trader can gift a crypto token i.e. a virtual currency token or a denomination of a cryptocurrency.

Tax on Gifting Crypto

Section 56 of the Income Tax Act levies provision for taxation of gifts of immovable property, cash, and specified movable assets such as shares, jewellery, etc. Under Budget 2022, the finance minister amended Section 56 for taxation of gifts to include ‘Virtual Digital Asset’ in the definition of property i.e. movable assets. A Virtual Digital Asset i.e. VDA includes cryptocurrency, NFT, and any other notified digital asset. Below is the tax treatment on the gifting of crypto, NFT, and other VDAs. It is taxable in hands of the receiver applicable from FY 2022-23:

Type Taxability
VDA Gift with value up to INR 50,000 Exempt from tax
VDA Gift with value exceeding INR 50,000 received from relative Exempt from tax
Gift of VDA with value exceeding INR 50,000 received from non-relative Taxable in hands of receiver
Received on occassion of marriage, via inheritance or will or in contemplation of death Exempt from tax

Definition of relative for tax on gifting crypto – spouse, children, parents of individual or spouse, brother/sister of individual or spouse, brother/sister of parents of individual or spouse.

Tax on giving a Crypto gift

Check the tax provisions for the giver of crypto gift on giving the gift and on sale of such gift by the receiver.

Tax on transfer of crypto gift for giver

As per Section 2(14) of the Income Tax Act, a virtual digital asset is a Capital Asset. The transfer of a Capital Asset is taxable as Capital Gains. However, the definition of ‘transfer’ as per Section 47 specifically excludes gifts. Thus, the gift of cryptocurrency, NFT, and other VDA is not taxable in the hands of the sender.

Tax on sale of crypto gift for giver

  • The sale of crypto gifted to the receiver is not taxable in the hands of the sender of the gift.
  • Clubbing of Income – If the receiver of the gifted crypto is a spouse or minor child, any income that arises directly or indirectly from such asset is clubbed with the income of the giver of the crypto gift.

Tax on receiving a Crypto gift

Check the tax provisions for the recipient of crypto gift on receiving the gift and on sale of such gift.

Tax on transfer of crypto gift for receiver

Crypto gift is taxable for the receiver if the monetary value exceeds INR 50,000 and is received from a non-relative. Further, crypto gift received on occasion of marriage or inheritance or in contemplation of death is not taxable. Such gift is taxable at slab rates under the head IFOS (Income from Other Sources).

Tax on sale of crypto gift for receiver

Capital Gains tax would arise on the sale or conversion of cryptocurrency. To calculate the tax on gifted crypto, here are important points to consider:

  • Period of Holding – Calculate the holding period from the date of purchase by the previous owner i.e. sender of gift to the date of sale by the receiver of the gift.
  • LTCG – Virtual Digital Asset (VDA) held for more than 36 months from date of purchase by the sender to date of sale.
  • STCG – Virtual Digital Asset (VDA) held for up to 36 months from date of purchase by the sender to date of sale.
  • Purchase Date – The date of purchase by the previous owner i.e. sender of the gift
  • Purchase Value – The value of the purchase of the previous owner i.e. sender of the gift
  • Sale Date – The date of sale by the receiver of the gift
  • Sale Value – The value of the sale by the receiver of the gift
  • Tax Liability – Tax rate on sale of cryptocurrency is 30% without claiming deductions for cost of acquisition, cost of improvement, or transfer expenses
Transaction Sender Receiver
Gift of Virtual Digital Asset Not taxable Exempt Income or IFOS Income
Sale of Virtual Digital Asset Not taxable Capital Gains

Clubbing of Income – If the receiver of the gifted crypto is a spouse or minor child, any income that arises directly or indirectly from such asset is clubbed with the income of the giver of the crypto gift.

FAQs

What are the Tax Implications for gifting cryptocurrency in India?

Under Budget 2022, it was announced that the gift of crypto shall be taxable in the hands of the receiver. Based on the changes in Finance Bill 2022, the tax normal income tax provisions as per Section 56 apply to the gift of cryptocurrency too. Therefore, the gifting of cryptocurrency, NFT, or other Virtual Digital Assets is taxable in the hands of the receiver if received from a non-relative for a value exceeding INR 50,000.

Can I give cryptocurrency as a gift?

Yes. You can give cryptocurrency as a gift. However, there are tax implications for the same. The receiver of the gift is liable to pay tax on a crypto gift received from a non-relative in excess of INR 50,000. The giver of the crypto gift is not liable to pay any tax on the same.

Do I need to report a gift of cryptocurrency on my taxes?

Yes. If you have received a gift of cryptocurrency from a person other than a relative of value exceeding INR 50,000, you must report it under the head IFOS in the ITR and pay tax at slab rates. Further, when you sell the crypto gift, you must report it under the head Capital Gains and pay tax at 30%.

GST on Supply of Cryptocurrency, NFT, VDA (Virtual Digital Asset)

The taxation of cryptocurrency and other digital assets has been a point of discussion amongst traders for many years. Under Budget 2022, the finance minister brought clarity on the taxation of cryptocurrency by defining it as a Virtual Digital Asset i.e. VDA. Income Tax on crypto, NFT, and other digital assets is leviable at the rate of 30% under Section 115BBH. Further, TDS on crypto transfer is leviable at the rate of 1% under Section 194S of the Income Tax Act. However, there is no clarity on the applicability of GST on cryptocurrency, NFT, and other Virtual Digital Assets (VDA). Let us understand if GST is applicable to crypto as per the GST rules and regulations.

The GST Council is planning to levy a 28% GST on cryptocurrency and digital assets. This idea is to tax cryptocurrency just like income from lottery, betting, casinos, or horse racing.

What is a cryptocurrency or digital asset under GST Act?

The GST Act does not define cryptocurrency or digital assets. However, as per the Finance Bill 2022, a Virtual Digital Asset i.e. VDA means any information, code, number, or token generated through cryptographic means providing a digital representation of value exchanged and can be used in any financial transaction. Such assets can be stored or transferred electronically. VDA also includes a non-fungible token i.e. NFT and any other digital asset notified by the Central Government.

Is the sale of cryptocurrency taxable under GST?

Let us understand if VDA can be classified as a good or service based on the definition as per the GST Act.

Definition of Goods, Services, Money & Securities as per GST Act

As per Section 2(52), Goods mean any movable property except money and securities. The definition of Services means anything other than goods, money, and securities. However, services do include the conversion of money from one currency to another by charging a separate consideration such as brokerage, commission, or interest.

Money means a legal tender, foreign currency, cheque, electronic remittance, or any other instrument recognised by RBI to settle an obligation. Securities mean bonds, debentures, shares, derivatives, government securities, or instruments of similar nature.

Is cryptocurrency a good or service as per GST Act?

As per the above definition, Virtual Digital Assets (VDA) cannot be classified as money or securities. Further, it can also not be classified as Service as per GST Act. However, considering it as movable property, it can be classified as Goods as per GST.

Is the sale of crypto exempt under GST?

The list of exemptions under Schedule III of the GST Act does not cover the sale of cryptocurrency, NFT, or digital assets. Thus, it is not a transaction exempt from GST. Therefore, the sale of crypto, NFT, and VDA is taxable under the GST Act.

Is crypto exchange liable to pay GST on its services?

Yes. Services provided by crypto exchanges are taxable services under GST. Thus, the crypto exchanges are liable to collect GST from the traders and deposit the same with the GST department. GST is included in the trading fee that is added to the buying price of ether, bitcoin, ripple, etc. In the case of a crypto exchange located outside India, the place of supply of service is the location of the service recipient i.e India. Therefore, the service recipient i.e. crypto trader is liable to pay GST on a reverse charge basis.

Who needs to pay GST on supply of cryptocurrency and digital assets?

The seller of cryptocurrency or digital assets must collect GST from the buyer and deposit it with the government. There is no defined HSN Code and GST Rate for digital assets. Thus, HSN Code 960899 under the category ‘others’ with a tax rate of 18% can be used for reporting the sale of crypto.

The seller is liable to register under GST Act if the Aggregate Turnover exceeds the threshold limit of INR 40 lacs during the financial year. Once the seller of crypto registers under GST, they must collect and pay GST on each sale transaction.

The seller can claim Input Tax Credit of the following:

  • GST paid on the purchase of cryptocurrency, NFT, VDA
  • GST paid on services used for the business of crypto trading such as consultancy services, software expenses, broker commission, mining cost, etc

The GST department has not yet clarified the taxability of cryptocurrency and other digital assets. Crypto traders and crypto exchanges should comply with the existing GST provisions until the GST Council clarifies the taxability of cryptocurrency.

FAQs

Is GST applicable to sale of cryptocurrency in India?

Cryptocurrency falls under the definition of goods as per the GST Act. Thus, the sale of crypto is taxable under GST. Further, the sale of cryptocurrency or digital assets is not covered under the list of GST exemptions. Thus, GST is applicable to the sale of cryptocurrency in India.

Is GST applicable to cryptocurrency trading in India?

Cryptocurrency trading i.e. sale of crypto is taxable under the GST Act since it is not specifically exempted from GST. Further, the crypto exchanges are liable to pay GST on their services. They include the GST in the trading fee charged to the crypto traders. Therefore, crypto traders are liable to pay GST on crypto trading.

Who is liable to pay GST on the sale of cryptocurrency in India?

The seller of cryptocurrency or digital assets must collect GST from the buyer and pay it to the government. The seller is liable to register under GST Act if the aggregate turnover exceeds the threshold limit of INR 40 lacs during the financial year. Once the seller of crypto registers under GST, they must collect and pay GST on each sale transaction. They can claim Input Tax Credit of GST paid on the purchase of crypto or other related services.

Income Tax Notice for Crypto Trading under Section 148

The Income Tax Department had sent out notices to multiple crypto traders under Section 148A(b) of the Income Tax Act. The ITD issued income tax notices to taxpayers who had indulged in cryptocurrency trading but did not report them in the ITR and pay tax on cryptocurrency trading. Under the tax notice, the department asked the assessee to explain the transactions with supporting documents and books of accounts. The intention is to track the sources of income used for crypto transactions. This is a show-cause notice where the taxpayer needs to justify why the AO should not issue a notice to them u/s 148 for income escaping assessment. Let us understand the tax notice for crypto trading, how to respond, and the penalty if you have not reported crypto income in the ITR.

What is Section 148 of the Income Tax Act?

The ITD has issued notices under clause (b) of Section 148A of the Income Tax Act. Section 148A is the section for conducting inquiry and providing opportunity before issue of notice under Section 148. Clause (b) of Section 148A seeks to provide the taxpayer an opportunity of being heard by serving a show cause notice. The taxpayer needs to explain why the tax authority should not issue a notice under Section 148.

The tax authority issues notice under Section 148 of Income Tax Act where the income has escaped assessment. This is a time bound notice and the taxpayer needs to submit a response within the specified time period. The Assessing Officer i.e. AO can issue notice u.s 148 if:

  • The AO has information that the taxable income of the taxpayer has escaped assessment, and
  • The AO has taken prior approval from the specified authority to issue such notice

Tax Notice for Crypto Trading under Section 148A(b)

Tax notice under Section 148A(b) for crypto trading was issued to multiple traders for FY 2015-16, FY 2016-17, and FY 2017-18. The tax notice comprised of the following information:

  • Value of transactions in crypto trading
  • Relevant financial year
  • The income from crypto transactions was not reported as LTCG or STCG

The bitcoin traders were asked to do the following:

  • Attend the ITD office with books of accounts and other relevant documents.
  • To produce the bank statements of all bank accounts of themselves and family members
  • Submit computation of gain or loss arising out of investments done in the relevant financial year
  • Share investment details in India and abroad, the source of income, and trading details of bitcoin and other cryptocurrencies
  • Declare crypto wallet details in India and abroad, transactions through wallets, and source of money deposited in these wallets
  • Submit a response to the notice within the given time period

How does Income Tax Department know about my cryptocurrency trading?

The cryptocurrency exchanges ask for the PAN of the traders while setting up their accounts for crypto trading. The Income Tax Department collated and analysed this data of bitcoin users from major cryptocurrency exchanges in India. Later, they issued tax notices to crypto traders having significant crypto transactions.

Further, the Income Tax Department received data of crypto trading through the VRU/CRIU functionality on the Insight Portal of Income Tax. CBDT issued a circular on 10th December 2021 to commissioners of income tax to upload information on Insight portal. The Circular had instructions to upload information on VRU/CRIU functionality for issue of notice u/s 148 of Income Tax Act. VRU i.e. Verification Report Upload is a functionality on Insight Portal of Income Tax where information of income escaping assessment is uploaded. CRIU i.e. Case Related Information Upload is a functionality where information of bulk nature such as penny stock transactions, etc is uploaded. On the basis of this information, the ITD issued notices to multiple crypto traders under Section 148A(b) of Income Tax.

Penalty on tax notice for crypto trading u/s 148

A trader having income from trading cryptocurrency, NFT (Non-Fungible Token), or VDA (Virtual Digital Asset) is liable to pay tax at 30% u/s 115BBH. Section 115BBH was introduced in Budget 2022 and is applicable from FY 2022-23. Thus, a crypto trader must report income from crypto trading as capital gains in the ITR and pay tax of 30% on profits.

However, in the absence of any provision in the earlier years, many traders did not report income from crypto trading and did not pay tax. The AO has the authority to open the case for assessment or reassessment by issuing a notice under Section 148 of the Income Tax Act. The AO may also impose a penalty of 50% of tax payable in the following cases:

  • If the income assessed by AO exceeds the income reported by the crypto trader in the ITR
  • If the income assessed by AO exceeds the basic exemption limit if the crypto trader has not filed the ITR

In addition to the tax liability, the AO also has the authority to impose penalty on the failure of compliance at the taxpayer’s end. Below is a summary of penalty that the AO can impose.

Section Description Interpretation Penalty Imprisonment
Sec 272A(1) Refusal or failure to give evidence or produce books of accounts, etc in compliance with summons under Section 131(1) If assessee does not produce books of accounts and relevant documents as asked for by AO for notice u/s 148A INR 10,000 for each failure or default No Imprisonment
Sec 276CC Failure to furnish ITR in response to notice u/s 148 If assessee fails to file ITR in response to the notice under Section 148 No Limit 6 mth to 7 yrs – If tax liability exceeds INR 25 lacs
3 mth to 2 yrs – other cases

Reply to tax notice under Section 148 for crypto trading

The crypto trader must respond to the income tax notice within the stipulated time period. You can submit a response as per the instructions mentioned in the tax notice. Submit a response either through email or from the option of e-proceedings on your account on the income tax website.

Section 115BBH for taxation on virtual digital assets would be effective from 1st April 2022 i.e. FY 2022-23 onwards. Since there was no specified tax provision for tax on income from crypto trading for the earlier years, the taxpayer should consider the following while submitting a reply to the tax notice:

  • To submit response to notice under Section 148A, justify the nature of transactions and source of income. Further, provide the relevant documents and books of accounts to the tax officer.
  • Treat the income as Capital Gains or Business Income based on the trader’s intention and the frequency of transactions. Thus, if there were significant trading transactions or the intention is to earn profits, report the income as business income. However, if there were few transactions or the intention is to invest for long-term appreciation, report the income as capital gains.
  • If you had reported the crypto trading income in your ITR and paid tax on it, you can submit a response explaining the nature of transactions and their treatment in the ITR.
  • If you had not reported the crypto trading income in your ITR, you must now file an ITR in response to the notice under Section 148, report all your income, and pay tax on it.

FAQs

Is crypto trading legal in India?

In the Budget 2022 speech, Nirmal Sitharaman clarified that taxing cryptocurrencies do not give them legal status in the country. Thus, the legality of cryptocurrency in India is still under question. However, the government introduced Section 115BBH for the taxation of income from virtual digital assets. Thus, crypto traders must report the trading income in ITR and pay tax at 30% u/s 115BBH.

What is VRU/CRIU in Income Tax?

The income tax officers were asked to upload the information of the crypto trading transactions on the VRU/CRIU functionality on the Insight Portal. VRU i.e. Verification Report Upload is the functionality using which the AOs upload information and verification results for the taxpayers having income escaping assessment from AY 2013-14 to AY 2017-18.
CRIU i.e. Case Related Information Upload is the functionality using which the AOs upload information of bulk nature such as penny stock transactions, beneficiaries in case of entity operators, etc.

What happens if I don’t file my cryptocurrency taxes?

Income from trading in cryptocurrency is a taxable income and must be reported in the Income Tax Return. FY 2022-23 onwards, crypto income must be reported as Capital Gains and tax should be paid at 30% under Section 115BBH of the Income Tax Act. Further, crypto traders cannot claim a deduction of any expenses other than the cost of acquisition. They cannot carry forward the loss to future years.
In the earlier years, if you have not reported your income from crypto trading, the taxman may issue a notice under Section 148 for income escaping assessment.

TDS on Cryptocurrency, NFT, VDAs – Section 194S

What is Section 194S for TDS on Cryptocurrency?

Under Budget 2022, Finance Minister Nirmala Sitharaman introduced Section 194S to impose TDS on the transfer of cryptocurrency and other VDAs (Virtual Digital Assets). Section 194S is effective from 1st July 2022 and not 1st April 2022. To trace the transactions of VDAs and cryptocurrency, the government introduced this provision of deducting TDS at 1% in the case of transfer of a VDA if the aggregate value exceeds INR 10,000 during the financial year.

The Budget also introduced the provision for tax on cryptocurrency, NFT, and VDA at the rate of 30% under Section 115BBH. The crypto trader can neither claim any expenses nor set off or carry forward such loss. Further, the taxpayer cannot claim Chapter VI-A deductions against such income.

What is a Virtual Digital Asset (VDA)?

TDS under Section 194S must be deducted on the transfer of a VDA i.e. Virtual Digital Asset. VDA covers the following:

  • Cryptocurrency – information or code or number or token generated through cryptographic means or otherwise
  • NFT – Non-Fungible Token or any other token of similar nature
  • Any other digital asset notified by the central government in the official gazette

When to deduct TDS u/s 194S for TDS on Cryptocurrency?

TDS should be deducted on the transfer of the VDA (Virtual Digital Asset) if the aggregate amount during the financial year exceeds the threshold limit of INR 50,000 in the case of specified persons or INR 10,000 in the case of others. The deductor should deduct TDS only if the payee holds the status of a resident in India.

The threshold limit of INR 50,000 applies in the case of specified persons. Specified persons cover Individual or HUF having:

  • No income from business or profession OR
  • Business Income of up to INR 1 Cr or the Profession Income of up to INR 50 lacs

Who shall deduct TDS u/s 194S for TDS on Cryptocurrency?

Section 194S mandates the deduction of TDS by the person responsible for making the payment (i.e buyer) on the transfer of a virtual digital asset. However, the seller of Virtual Digital Asset is not known to the buyer of the Virtual Digital Asset since the trading happens over a digital exchange. The applicability of TDS under Section 194S required more clarity. Thus, the income tax department issued a circular to clarify the role of crypto exchanges and the brokers with respect to deduction of TDS on the sale transactions of cryptocurrency and other VDA. Lets understand the liability to deduct TDS of parties involved in different scenarios.

Case 1: Peer to Peer (P2P) transfer of VDA

Case 2: Transfer of VDA takes place on or through an Exchange and the VDA is owned by a person other than the Exchange:

Scenario 1: Buyer would be crediting or making payment to the Exchange (directly or through a broker).

Scenario 2: The credit/payment between Exchange and the seller is through a
broker (and the broker is not seller)

Case 3: Transfer of VDA takes place on or through an Exchange and the VDA is owned by such Exchange

Scenario 1: Buyer would be crediting or making payment to the Exchange through a broker

Scenario 2: Buyer would be crediting or making payment to the exchange directly

Case 4: Transfer of VDA takes place where the consideration for transfer of VDA is in kind

Scenario 1: The transaction is not through an Exchange

Scenario 2: The transaction is through an Exchange

TDS Rate u/s 194S for TDS on Cryptocurrency

The deductor should deduct TDS under Section 194S at the rate of 1% of the transfer amount at the time of the payment for the transfer of VDA (Virtual Digital Assets).

If the payer makes the payment in kind or for exchange of another VDA or pays partly in cash and partly in kind, they must make sure that they deposit the TDS with the government before making the payment.

If the payer is a specified person, there is no requirement of obtaining TAN as per Section 203A of the Income Tax Act. Further, if the payer is a specified person, the provision to deduct TDS at higher rate as per Section 206AB for non-filers of ITR is not applicable
Tip
If the payer is a specified person, there is no requirement of obtaining TAN as per Section 203A of the Income Tax Act. Further, if the payer is a specified person, the provision to deduct TDS at higher rate as per Section 206AB for non-filers of ITR is not applicable

Due Date to deposit TDS under Section 194S

Particulars Time Limit to deposit TDS
If the amount is credited in the month of March

On or before 7th April for Government Deductor
On or before 30th April for Other Deductor

If the amount is credited in a month other than March Within 7 days from the end of the month in which deduction is made

TDS Certificate for Section 194S

Deductor i.e. payer shall issue a TDS Certificate to the deductee i.e. payee in Form 16A for TDS deducted on the transfer of virtual digital asset.

The deductee i.e. seller can claim the TDS Credit in the Income Tax Return. He/she can view the details of tax deducted under Section 194S in Form 26AS on the income tax website.

TDS Return for Section 194S

The Deductor i.e. payer is liable to deduct tax under section 194S of the Income Tax Act. They shall file quarterly returns in Form 26Q within the following due dates:

Quarter Due Date
April to June 31st July
July to September 31st October
October to December 31st January
January to March 31st May

 

FAQs

Do I need to pay Income Tax on the sale of cryptocurrency?

Yes. Budget 2022 introduced the provision for taxation of profit on sale of cryptocurrency and other VDAs at the rate of 30% under Section 115BBH. The crypto trader can neither claim any expenses nor set off or carry forward such loss. Further, the seller cannot claim Chapter VI-A deductions against such income. The income on sale of cryptocurrency must be reported under the head Capital Gains in the Income Tax Return.

Who will deduct TDS on cryptocurrency?

The person responsible for making payment on the transfer of cryptocurrency or other VDAs must deduct TDS at the rate of 1% under Section 194S if the aggregate transfer amount in the financial year exceeds INR 10,000. However, if the payer is a specified person as per Section 194S, they should deduct TDS if the aggregate transfer amount in the financial year exceeds INR 50,000.

How can I claim tax credit of TDS deducted on my crypto income?

If TDS has been deducted on your income from sale of cryptocurrency under Section 194S, you can claim the tax credit of the same in the Income Tax Return. However, you can claim such tax credit only if the payer deposits the TDS with the government and files the TDS Return to report such TDS. You must collect the TDS Certificate from the payer.

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

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.

  • What is a Virtual Digital Asset (VDA)?
    As per Section 2(47)(A) of the Income Tax Act, a Virtual Digital Asset (VDA) includes cryptocurrency, Non-Fungible Tokens (NFTs), and any other digital asset notified by the central government in the official gazette.
  • Section 115BBH of the Income Tax Act
    If a taxpayer has income from the transfer of VDA, they must pay income tax at flat rate of 30%.
  • Deductions on transfer of VDA
    • The taxpayer cannot claim any expense or allowance against such income.
    • The taxpayer can claim the cost of acquisition i.e. purchase price as a deduction from the income.
      Thus, Taxable Income = Selling Price – Purchase Price.
    • Taxpayer cannot set off the loss from the transfer of VDA against any other income. Further, he/she cannot carry forward the loss to future years.
  • Gift of Crypto Investment
    A gift of cryptocurrency, NFT, or other VDA is taxable in the hands of the receiver.

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:

  • As per Section 2(14) of the Income Tax Act, the definition of Capital Asset includes ‘any other capital asset’. Cryptocurrency and other VDAs can be treated as other capital assets.
  • The term ‘transfer of asset’ as per Section 115BBH usually refers to capital assets.
  • The term ‘cost of acquisition’ as per Section 115BBH is usually used to calculate income from capital gains.

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:

  • Section 115BBH is in line with Section 115BB for tax on winning lottery, betting and gambling which is taxed under the head IFOS
  • As per Section 2(14) of the Income Tax Act, the definition of Capital Asset does not specifically include Cryptocurrency and other VDAs.

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:

  • Capital Gain = Full Value of Consideration (Selling Price) – Cost of Acquisition (Purchase Price)
  • Taxpayer cannot claim transfer expenses i.e. expenses incurred on transfer
  • Taxpayer cannot claim the Cost of Improvement as an expense
  • Indexation benefit is not available
  • Taxpayer cannot claim a capital gain exemption under Section 54 to 54F
  • Taxpayer cannot claim deduction under chapter VI-A on such income
  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:

  • Taxpayer cannot set off the loss from the transfer of one VDA against profit from the transfer of another VDA
  • Taxpayer cannot set off the loss from the transfer of VDA against any other income
  • The taxpayer cannot carry forward the loss on the transfer of VDA to future years
  • The taxpayer cannot set off a loss under any other head of income against profit on the transfer of VDA

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)

Tax and Legality of Bitcoin in India

Cryptocurrency is digital money. Cryptocurrency uses something called cryptography to secure its transactions. With the soaring prices, bitcoins have become a hot favorite amongst Indians lately. In this article, we will be discussing the tax on bitcoin. There are a number of cryptocurrencies that have been created such as Bitcoin, Litecoin, Ethereum, Ripple, etc. Under Budget 2022, the finance minister introduced provisions for tax on cryptocurrency, NFT, and VDA. However, in her Budget Speech, Nirmala Sitharaman also clarified that taxing cryptocurrency does not give them legal status in India.

What is Bitcoin?

Bitcoin often described as a cryptocurrency, a virtual currency, or a digital currency – is a type of money that is completely virtual. It’s like an online version of cash. Bitcoin was the first cryptocurrency generated in 2009. Later, other cryptocurrencies such as Ethereum, ripple, litecoin, dash, etc came into existence.

The Bitcoin apps ensure you have a bitcoin wallet that helps in storing and selling bitcoins. The creation of wallets takes place when you sign in and create your account. Balances of Bitcoin tokens are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them.

Generation of Bitcoins

One can obtain the bitcoins in the following ways:

  • Mining
    • Even though bitcoin is a virtual currency, its production incurs real costs. One has to ‘mine’ bitcoins and this process consumes electricity.
    • Every Individual (called the “miner”) has to solve a complicated cryptographic problem and the miner is rewarded with a block of bitcoins.
    • People set up powerful computers just to try and get Bitcoins. This is Bitcoin mining.
    • So, mining is directly proportional to the expense. The competition in solving this complex problem can make the process even more costlier.
  • Buying on an exchange against real Currency
    • You can buy bitcoins from bitcoin exchanges and store them in an online bitcoin wallet in digital form.
    • You can choose any of these Bitcoin exchange platforms – Coinsecure, Zebpay, UnoCoin, etc
    • Bitcoins are purchasable in consideration of real currency.
  • In consideration of goods and services
    • You can use bitcoins (instead of real currency) to buy products and services, but not many shops accept Bitcoin yet and some countries have banned it altogether.

Tax on Bitcoin & Legality in India?

No specific body administers or regulates Bitcoins similar to RBI which administers physical currency in India. Further, no central authority in India authorises or regulates Bitcoin as a medium of payment. As of now, RBI has not given the status of legal tender in India to cryptocurrency including Bitcoins.

Under Budget 2022, the finance minister introduced Section 115BBH with a 30% tax on virtual digital assets. The definition of virtual digital assets covers cryptocurrency and non-fungible tokens i.e. NFT. Thus, bitcoin is now taxable in India at a 30% rate. However, they are still not recognised as legal currency in India.

This article tries to analyze the taxation on bitcoins by considering them as both goods and currency. The holding period impacts the taxes on bitcoins. The tax treatment of bitcoins will depend upon their generation.

Tax on Bitcoin held as Investment

As per Sec 2(14) of the Income Tax Act, capital asset means “property of any kind held by the assessee whether or not connected with his business or profession”. The definition of ‘Capital Asset‘ provided is widest in itself and covers all kinds of property except those expressly excluded under the Act. Therefore, any gains arising out of the transfer of Bitcoins in exchange for real currency are treated as Income from Capital Gains, if they are held for investment. Bitcoins will give rise to a Long-term capital gain or a short-term capital gain depending on the period of holding of the bitcoin. Tax on Bitcoin held as Stock in Trade

The tax treatment of bitcoins when held as ‘stock in trade’ would give rise to income from business. Gain from the sale of bitcoin is taxable as business income if traded frequently.

Bitcoins received as consideration for the sale of goods and services

Bitcoins received as consideration of goods and services shall be treated on par with receipt of money. The receipt of bitcoin shall constitute income in the hands of the recipient. Further, since the recipient receives this income out of a business or profession, he would be taxed, normally, under the head “Profits or gains from business or profession“. With regards to the disclosure requirement of bitcoin in the income tax return forms, there continues to be a lack of clarity.

Bitcoin Mining

On the taxability of bitcoins earned during the ‘mining’ process, it is said that Bitcoins generated during the ‘mining’ process are classifiable as self-generated capital assets.

The sale of such bitcoins would, in the ordinary course, give rise to capital gains. However, the cost of acquisition of a bitcoin cannot be determined as it is a self-generated asset. Furthermore, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets. The capital gains computation mechanism fails following the Supreme Court decision in the case of B.C.Srinivasa Shetty. Hence, no capital gains tax would arise on the mining of bitcoins.

Note: There is a possibility that the department may not consider bitcoins as capital assets at all. Hence, the provisions of capital gains would not apply at all. However, the treatment is not yet clear under Indian law which makes it difficult to conclude how it may be taxed.

FAQ

How to set-up Bitcoin Wallet?

The Bitcoin applications ensure you have a bitcoin wallet that helps in storing and selling bitcoins. The creation of wallets takes place when you sign in and create your account.

What is the minimum amount of bitcoins that you can buy?

One bitcoin today might cost you up to INR 26 lakh but you don’t need to buy a whole bitcoin in the beginning. You can start with as low as INR 500 and buy a tiny portion of a bitcoin. However, there is a maximum limit to the number of bitcoins that you can buy.

How can you buy bitcoins in India?

Buying bitcoins in India is easy. You can choose any of these platforms – Coinsecure, Zebpay, and UnoCoin – which are widely trusted in the world of cryptocurrency.

How did the value of bitcoin increase so dramatically?

Mining is directly proportional to the expense. The competition of solving this complex problem can make the process even costlier. The limited availability of bitcoin has also increased its demand. The limited supply has fueled the bitcoin hype, which has led to a sharp increase in its price.

Can we use bitcoins only in India?

Bitcoins can be used anywhere across the globe because it is digital and is termed to be ‘globally accepted’.