The taxation of cryptocurrency and other digital assets has been a matter of debate amongst several years due to its decentralized nature and the potential for huge returns on investment. However, regulatory compliances surrounding cryptocurrencies are still evolving and applicability of taxes on cryptocurrency isa topic of considerable interest. In this article, we will discuss on the Taxation of Cryptocurrencies in India.
Understanding Cryptocurrency
As per Finance Bill 2022, a Virtual Digital Assets i.e VDA means any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically. VDA also means a non-fungible token or any other token of similar nature.
Neither cryptocurrencies nor digital assets are defined in the GST Act. The definition can be derived from above as defined in the Finance Bill. However, to be taxable under GST, it should be classified as either goods or services. ‘Goods’ inter alia means every kind of movable property other than ‘money’ and ‘securities’. Further, ‘money’ means legal tender or foreign currency recognised by RBI, therefore, digital assets are not classified as ‘money’ under GST. Also, digital assets do not fall within the meaning of ‘security’ defined under GST law as security includes shares, bonds, debentures or any other instrument.
As far as the exemption is concerned, the sale of crypto or digital assets is not covered in Schedule III of the GST Act or under any notification issued by the department. Hence, the sale of crypto or digital assets is taxable under GST.
UNDER GOODS AND SERVICES TAX
Taxability of various Crypto Activities
| Transaction | Possible GST Implication |
| Purchase of Crypto on payment of Indian Rupee or Foreign Currency | As cryptos may be classified as goods, the seller of cryptos may be liable to discharge GST Liability for the sale of cryptos |
| Services provided in connection with sale or purchase or exchange of cryptos | Supply of services in connection with the purchase, sale or exchange of cryptos for a consideration, charges as a service fee, liable to GST. Eg: services provided by a crypto exchange |
| Cryptocurrency Mining | It can be treated as supply of service since it generates cryptocutrrencies and involves rewards and transaction fees. GST may be payable by the miner on transaction fees or rewards. |
| Sale of private non-fungible tokens (NFT) | NFT, which are capable to be sold on digital markets are treated in the same manner as sale of intangible and ought to be taxed as such at the rate applicable for intangibles. |
Who needs to pay GST on supply of cryptocurrency and Digital Assets?
The seller of cryptocurrency or digital assets is required to 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 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
UNDER INCOME TAX
Taxability of Cryptocurrency Activities
1. The gains arising from trading cryptocurrencies are taxed at a rate of 30%(plus 4% cess) according to Section 115BBH. Any losses incurred in one virtual digital currency cannot be offset against any income, including gains from cryptocurrency. So, a crypto investor cannot off set previous year losses from a crypto asset while filing ITR of a particular year.
Moreover, investors in cryptocurrency are not permitted to claim expenses related to their crypto activities, except for the acquisition cost or purchase cost.
2. Section 194S levies 1% Tax Deducted at Source (TDS) on the transfer of crypto assets from July 01, 2022, if the transactions exceed ₹50,000 (or even ₹10,000 in some cases) in the same financial year.
3. Crypto tax applies to all investors, whether private or commercial, who transfer digital assets during the year.
4. Crypto Gains should be reported under Schedule VDA in the Income Tax Return.
5. The tax rate is the same for short-term and long-term gains, and it applies to all types of income earned by the investor. Therefore, gains from trading, selling, or swapping cryptocurrency will be taxed at flat 30% (plus a 4% surcharge) irrespective of whether the income is treated as capital gains or business income.
What type of Transactions are liable to tax:
Before understanding the type of transactions liable for tax, we should understand whether the gains on the crypto-transactions would become taxable as
- Business income
- Capital gains.
This classification will depend on the investors’ intention and nature of these transactions.
Business income: If there are frequent trades and high volumes, gains from the cryptocurrency may be categorised as ‘business income’. In such a case, you may use ITR-3 for reporting the crypto gains.
Capital gains: On the other hand, if the primary reason for owning the cryptocurrency is to benefit from long-term appreciation in value, then the gains would be classified as ‘capital gains’. In this case, you may use ITR-2 for reporting the crypto gains.
Further, following are the list of transactions where cryptocurrency shall be taxed:
- Spending cryptocurrencies to purchase goods or services.
- Exchanging cryptocurrencies for other cryptocurrencies
- Trading cryptocurrency using Indian or Foreign currency
- Receive crypto currency as payment for a service
- Receiving cryptocurrency as a gift
- Mining cryptocurrency
- Drawing a salary in crypto
- Staking crypto and earning stake benefits
- Receiving Airdrops
Conclusion: Navigating the taxation landscape for cryptocurrencies and digital assets requires a comprehensive understanding of GST and income tax implications. Crypto investors must be aware of their tax responsibilities, keep meticulous records, and stay updated with evolving regulations. By adhering to these guidelines and seeking professional assistance when needed, crypto investors can ensure compliance and manage their tax liabilities effectively.
For any further information or clarifications, the author can be reached at cashubhikhandelwal@gmail.com
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