With the meteoric rise of cryptocurrencies and NFTs (Non-Fungible Tokens), they have become a popular investment avenue for many Indians. However, as the crypto market gains more traction, the Indian government has introduced regulatory measures, particularly taxation, to bring digital assets under its tax umbrella. This blog delves into how cryptocurrencies and NFTs are taxed in India, offering clarity on the implications for investors.
Key Highlights on Cryptocurrency Taxation in India
- Cryptos Recognized as Capital Assets
A landmark ruling by the Income Tax Appellate Tribunal (ITAT) has classified cryptocurrencies like Bitcoin, Ethereum, and Dogecoin as capital assets rather than income from other sources. This distinction paves the way for taxing profits from the sale of cryptocurrencies as capital gains instead of income. - Flat Tax Rate of 30% on Gains
As per Section 115BBH of the Income Tax Act, profits derived from the transfer of cryptocurrencies are taxed at a flat rate of 30%, exclusive of surcharge and cess. Investors cannot claim deductions except for the cost of acquisition. Expenses such as transaction fees, mining costs, or depreciation are non-deductible. - No Tax on Long-Term Holding
Merely holding cryptocurrencies in a wallet for the long term does not attract any tax. Tax liability arises only when these digital assets are sold, exchanged, or spent, triggering a taxable event.
How Cryptocurrency Transactions Are Taxed
1. Taxation on Purchase of Cryptos
When buying cryptocurrencies, a 1% TDS (Tax Deducted at Source) under Section 194S is applicable if:
- The payment exceeds ₹50,000 annually for specified individuals.
- The payment exceeds ₹10,000 annually for others.
The specified individuals include those with no income from business or professional gains or those with turnover not exceeding ₹1 crore in business or ₹50 lakh in professional receipts.
2. Taxation on Selling Cryptos
Profits made by selling cryptocurrencies are treated as capital gains:
- Short-term capital gains (STCG): If sold within 36 months, taxed as per the individual’s income tax slab.
- Long-term capital gains (LTCG): If held for more than 36 months, taxed at 20% with indexation benefits.
Note: Losses from cryptocurrency transactions cannot be offset against other incomes and cannot be carried forward to subsequent financial years.
A Case Study: ITAT Ruling on Crypto Taxation
The ITAT ruling came in a case where a Bengaluru-based former Infosys employee invested ₹5 lakh in Bitcoin during FY 2015-16 and sold it for ₹6.69 crore in FY 2020-21. The gains were reinvested in property, qualifying the taxpayer for an exemption under Section 54F of the Income Tax Act.
The ITAT decided the transaction occurred before the introduction of the Virtual Digital Assets (VDA) tax regime in 2022. Therefore, the gains were taxed as LTCG at 20% instead of the flat 30% applicable to VDAs. This case highlights how tax liabilities depend on the timing of cryptocurrency transactions.
NFT Taxation: How It Differs from Crypto
NFTs, categorized as Virtual Digital Assets (VDAs), are taxed similarly to cryptocurrencies under Section 115BBH. However, there are key differences:
- Flat Tax Rate: Gains from NFTs are taxed at 30% (plus surcharge and cess), with no deductions allowed except for the cost of acquisition.
- Loss Adjustment: Losses from NFT sales cannot be offset against gains from cryptocurrencies or other VDAs. This restriction makes tax planning essential for NFT investors.
For example, if an investor incurs a loss from selling NFTs, they cannot use this loss to reduce their overall tax liability from crypto profits or other income.
Annual Taxation for Long-Term Crypto Investors
Investors holding cryptocurrencies for the long term in wallets are not subject to annual taxation. Tax liability arises only when a taxable event—such as selling, exchanging, or spending—is triggered. This rule encourages long-term holding but requires careful planning for eventual transactions to minimize tax burdens.
Taxation Challenges for Crypto Investors
- Lack of Deductions
Cryptocurrency investors face stringent rules as no deductions (other than the cost of acquisition) are allowed. Expenses like mining costs and transaction fees are not deductible, increasing the effective tax rate. - No Cross-Asset Loss Adjustment
Losses from crypto or NFT transactions cannot be set off against other income or gains, making it crucial for investors to assess potential losses carefully. - Complex TDS Compliance
The 1% TDS on crypto transfers exceeding specified thresholds adds an administrative burden. Platforms facilitating transactions are responsible for deducting and depositing TDS, requiring investors to keep detailed records.
Why This Taxation Framework Matters
The ITAT ruling and the government’s clear tax structure are significant for the following reasons:
- Investor Clarity: Classifying cryptocurrencies as capital assets helps investors understand their tax liabilities and plan investments effectively.
- Regulatory Compliance: Taxing VDAs ensures these assets are brought under the formal economy, reducing risks of money laundering and tax evasion.
- Encouraging Long-Term Investments: By not taxing held cryptocurrencies, the framework promotes long-term holding, stabilizing the volatile crypto market.
What Crypto Investors Should Do
- Maintain Detailed Records: Keep track of all crypto transactions, including purchase prices, sale prices, dates, and expenses incurred.
- Consult Tax Experts: Given the complexities of crypto taxation, consulting a Chartered Accountant or tax advisor is advisable.
- Plan Transactions: Consider the timing of buying and selling to optimize tax liabilities. Selling assets held for more than 36 months to qualify for LTCG benefits can significantly reduce taxes.
- Be Aware of Changes: Taxation laws for cryptocurrencies and NFTs are evolving. Stay updated on new regulations to ensure compliance.
Conclusion
The taxation of cryptocurrencies and NFTs in India has undergone significant changes, offering clarity and structure for investors. While the flat 30% tax rate might seem high, the recognition of cryptos as capital assets and the LTCG benefits provide relief for long-term investors. However, the lack of deductions and cross-asset loss adjustments calls for meticulous tax planning.
For investors in digital assets, understanding the nuances of these regulations is essential to make informed decisions, minimize tax liabilities, and stay compliant with Indian tax laws. As the crypto market continues to grow, navigating its taxation landscape effectively will be crucial for maximizing returns.
Source: Business Today
