Understanding Taxation of Cryptocurrency In India

By EditorialWednesday July 6, 2022

Crypto tax in India: from April 1, a 30 in step with cent i-t plus cess and surcharges could be levied in an equal manner as it treats winnings from horse races or different speculative transactions. Cryptocurrency investors need to pay tax from April 1.

India distinguishes among cryptocurrencies and crypto assets, and union finance minister Nirmala Sitharaman all through the union finances 2022-23 in February introduced a 30 according to cent tax on income from those transactions, which incorporates a 1 according to cent deduction at source

How to Pay Tax on Cryptocurrency in India

Cryptocurrency can be defined as a decentralised virtual asset and a medium of trade based totally on blockchain generation. During the union price range 2022, finance minister Nirmala Sivaraman brought a flat 30 according to cent tax on all profits arising from the sale of digital virtual property, such as cryptocurrencies. Furthermore, the finance minister additionally added 1 per cent TDS on all crypto transactions. Crypto is taxed like shares and different varieties of assets. When you understand an advantage after promoting or removing crypto, you’re required to pay taxes on the quantity of the advantage. The tax costs for crypto profits are the same as capital gains taxes for stocks.

it is not the maximum thrilling part of crypto investing, however in case you do make investments, you want to realize how taxes on crypto paintings. Although cryptocurrencies are nonetheless new, the IRS is running tough to enforce crypto tax compliance. There are quite a few approaches that you may end up owing taxes on crypto, and even trading one cryptocurrency for any other is a taxable occasion. In case you do not maintain correct data, it can be tough to piece together your gains and losses at tax time. And, if you don’t pay your crypto taxes, even though it is a sincere mistake, you can come to be suffering costly consequences. This guide will explain the whole lot you want to recognise approximately taxes on crypto trading and profits. You may study the way to record crypto taxes, crypto tax fees, and different essential information about this complex difficulty. You owe crypto taxes in case you spend your crypto and it has improved in price from when you first sold it. Here are the different styles of taxable activities for cryptocurrency transactions:

selling cryptocurrency for a fiat currency
using cryptocurrency to purchase items or services
buying and selling specific varieties of cryptocurrency
those are the best taxable events if the cost of your crypto has long gone up. To determine in case you owe crypto taxes, you want the value basis, which is the whole amount you paid to collect your crypto. Then you compare that to the sales rate or proceeds when you used the crypto. Let’s say you formerly offered one bitcoin for $20,000. Right here are examples of taxable events.
if you sell one bitcoin for $50,000, you’d record $30,000 in gains. If you use one bitcoin to buy a $45,000 automobile, you would file $25,000 in gains. In case you change one bitcoin for $60,000 of every other cryptocurrency, you would report $40,000 in profits. Trades between coins are where crypto taxes get complex. A crypto change is a taxable event. In case you alternate one cryptocurrency for some other, you’re required to record any gains in u. S. Greenbacks to your tax go back. Whenever you exchange cryptocurrencies, you want to maintain a song of ways an awful lot you won or lost in u. S. Dollars. That way, you can accurately document your crypto gains or losses. If you’d rather maintain it simple, cryptocurrency shares ought to make it easier to music profits and losses as compared to shopping for and promoting particular coins.

How to Report Crypto on Taxes?

Crypto profits and losses are stated on form 8949. To fill out this form, provide the subsequent records about your crypto trades:

name of the cryptocurrency
the date you received it
the date you sold, traded, or otherwise disposed of it
proceeds or income charge
fee foundation
total advantage or loss
repeat this system with each taxable crypto event you had for the year.

How is Crypto Income Taxed?

Crypto income is taxed as ordinary income at its fair market value on the date the taxpayer receives it. Here are the most common examples of what is considered crypto income:

Receiving crypto as payment for providing a service
Mining crypto and earning rewards
Staking crypto and earning rewards
Lending crypto and receiving interest payments

How to Save Tax on Crypto in India?

However, legal experts say you cannot avoid paying 30% tax on crypto income by investing in foreign exchanges. It is important to understand that 30% tax is on the income Indian investors may make from crypto or other VDAs.

There is no scope to save taxes on crypto earnings in India.

Even TDS to be effective from 1st July,2022 when 1% TDS to be deducted for every transaction of crypto.

Besides through a particular exchange you have to buy or sell coins. Before starting transactions, you have to submit KYC. In exchange, every transaction is recorded neatly.

Crypto assets will be taxable in India from April 1. There is going to be a heavy tax of 30 per cent on income from crypto. In addition, 1 per cent TDS will be deducted on crypto-related transactions. However, TDS will be effective from July 1, 2022. Similarly, the advantage of offsetting loss is not available in crypto. Suppose you lose from one crypto and gain from another, then it cannot be offset. This means that you have to pay tax on the profit margin. If you make a thousand from Bitcoin and lose 500 from ADA. So in this situation, your net profit may be 500 rupees, But you have to pay tax on the profit of one thousand rupees. Loss amount not to be calculated for crypto tax. The tax is only when you take profits. What I mean is that if you convert your bitcoin to rupees and transfer the money from a wallet like a vault or wazirx to your bank account. This is also called the realization of profits. Whatever profits you realize are going to get taxed. You cannot hide from that. There is one thing that you could do is to convert the profits to something called a Stable coin. These stable coins are pegged to the USD or Euro. In the world of crypto, you can think of these as FDs but these are not safe like your typical bank FDs.

Since these coins are pegged to the USD, they are way less volatile than cryptos. So what you can do is convert your profits to stable coins and do not realize those.

But once you realize you would have to pay taxes but you could hold on to profits by not realizing and saving your profits.

This is just a way to delay the taxes and not completely avoid those. But you can count on saving the profits and delaying the tax liability.

Role of Government in Taxation of Cryptocurrency in India

Nirmala Sitharaman in the Union Budget 2022 announced that “any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent.” “The new regime of flat 30% taxation on income from crypto assets from April 1, 2022, will ebb the sentiments for the new age asset class.

Crypto is taxed like stocks and other types of property. When you realize a gain after selling or disposing of crypto, you’re required to pay taxes on the amount of the gain. The tax rates for crypto gains are the same as capital gains taxes for stocks.

In India, there are no specific guidelines on the taxation of cryptocurrency in the Income-Tax Act, 1961. But taxpayers need to report transactions if they have invested in cryptocurrencies and gained from those investments.

Earlier this year, in March, Minister of State for Finance, Mr Anurag Singh Thakur said in response to a question by the Rajya Sabha that “the gains resulting from the transfer of cryptocurrencies/assets are subject to tax under the head of income, depending upon the nature of holding of the same”.

Can crypto-trading be classified as a business activity?

There on would be taxable as business income. If cryptocurrencies are held as ‘stock-in-trade,’ the income If a trader carries out cryptocurrency transactions often, any profit arising from there will also attract tax.

Therefore, while you are continuously trading in cryptocurrencies, you must know that the profits you gain will be taxable as business income.

So, while dealing with cryptocurrency, remember that you need to pay your tax if you have generated an income. Secondly, you must maintain a record of all your transactions. Most importantly, take the help of a taxation expert to guide you through.

RBI on Cryptocurrency in India

The Reserve Bank of India (RBI) governor reiterated his earlier warnings that private cryptocurrencies remain a threat to financial and macroeconomic stability. “They will undermine the RBI’s ability to deal with issues related to financial stability,” the governor had said.

“The RBI does not issue a cryptocurrency. Traditional paper currency is a legal tender issued by the RBI in terms of provisions of the RBI Act, 1994.

As many of you would already know, cryptocurrencies and other crypto products (like non-fungible tokens or NFTs) are being hailed as the innovations that would usher in decentralized finance or DeFi, which are blockchain applications geared to disrupt the traditional financial system. The basic purpose of blockchain, or more generally the distributed ledger, the technology on which these crypto-products run, is to make financial intermediation, and therefore banks, redundant. What might have escaped the attention of the common man, is that cryptos might be more than just a technology, they appear to embody an ideology as well. A Financial Times video characterizes the success of Bitcoin, the first and most popular cryptocurrency, as “healthy dissent, base greed, lofty idealism, and sheer fear of missing out”. The same FT video also says “Cryptos embody a core tenet of anarchism, cooperation in the absence of centralised authority”. The class of crypto products are fundamentally designed to bypass the established financial system and on a larger scale Government itself. Some enthusiasts even claim that cryptocurrencies can usher in a separation of money and state, like the separation of Church and State. Some refer to it as ‘freedom’ money. Or, as Nassim Nicholas Taleb is quoted to have written in the Time3 magazine, bitcoin is an insurance policy against an Orwellian future. It may thus not be adequate, from a regulatory point of view, to treat cryptos as just another type of currency or asset or commodity but also as a potential social movement. When a transaction is made using paper currency, all that the receiver needs to check is that the currency is not counterfeit. Thus, it is the receiver who authenticates the instrument of payment. This arrangement generally works, except for those few instances when the receiver fails to detect a counterfeit currency. In the case of digital transactions, the authentication of the payment is done by an intermediary like a bank, because almost all electronic transactions are transfers of money from one bank account to another. This arrangement also works as the bank certifies that the sender has an adequate balance in her account to cover the transaction. Some people felt that intermediation by banks is avoidable. Either they felt that banks are not trustworthy, or they considered that the cost charged by banks is excessive, or they were not comfortable with their transactions being tracked. Guided by the idea that cash remains one of the best ways to exercise free speech (refer to footnote 3), their solution was to create their private currency and a transaction arrangement or network that bypassed banks or any other financial or social institution. The basic problem they had to get over was as follows – since electronic money (just some lines of code) can be easily replicated, in the absence of a trust institution like a bank, how does the network ensure that the same currency is not spent again, and again. This was called the ‘double spending problem’. The first ‘person’ to effectively solve this problem was Satoshi Nakamoto, a fictional person or persons or corporate or any other entity, no one knows as yet. And bitcoin was born. He did this by creating the blockchain. On a blockchain, when a transaction occurs, it is broadcast to all computers on the network. A set of new transactions, called a block, are authenticated by an agreed consensus mechanism, and then the validated transaction block is added to the previous chain of blocks. Every block is linked to the previous block, making double-spending difficult because it would involve changing every subsequent block. Bitcoin was followed by many others, like ether, Cardano, dogecoin, tether, stellar etc. Collectively they are called cryptocurrencies. The prefix ‘crypto-‘ refers to the fact that cryptography is used to generate or authenticate transactions. The defining characteristics of cryptocurrencies are: –

Cryptocurrencies are decentralized systems where transactions are authenticated by participants themselves by consensus. They are designed to bypass the financial system and all its controls. They cannot be traced or confiscated or frozen by Governments.

They are anonymous – transactions are verified, but not the purposes or counterparties of transactions.

They are borderless – that is, they work over the internet without any physical existence. While Bitcoin started more than a decade back in 2008, until 5 years ago, the total market capitalisation of all cryptocurrencies was only $20 billion (February 2017). This went up to $289 billion in February 2020 and thereafter exploded to reach a peak of $2.9 trillion in November 2021. Currently (Feb 09, 2022) it stands at $1.98 trillion. Bitcoin accounts for 42% of this market capitalisation, the top two cryptocurrencies account for 61% while the top five account for 71%. The total number of cryptocurrencies is 17,436 and the total number of crypto exchanges is 458. A critical assessment of cryptocurrencies. With that brief, and somewhat simplistic, introduction to cryptocurrencies, we will now take a deeper look at the exact nature of cryptocurrencies and their implications, particularly in the context of the current debate in India on the topic. The starting point is to get a clear understanding on

(a) What precisely is a cryptocurrency?

(b) What useful economic role does a cryptocurrency play?

A cryptocurrency is designed to be a currency but does it function as a currency as we understand it. Firstly, currency always has an issuer, usually a trusted entity like the sovereign. Even when gold is used as a currency, the gold coins had to be issued by a sovereign entity. Secondly, historically, a currency has always been either a commodity with intrinsic value or a debt instrument. Cryptocurrencies do not conform to this understanding of a currency as they do not have an issuer, they are not an instrument of debt or commodities nor do they have any intrinsic value. Currency needs trust, not everything that can be trusted is a currency. So even if technology (as in a blockchain) provides the trust for cryptocurrencies, they can at best perform the role of a currency within the private and closed environment of that cryptocurrency. They do not, and should not, automatically become a currency for the larger society. Some countries tend to treat cryptocurrencies as a financial assets. This is also problematic because all financial assets have underlying cash flows and need to be some person’s liability. Cryptocurrencies are neither any person’s liability nor do they have any underlying cash flows. They are not financial assets, by definition. There is also an effort to treat cryptocurrencies as a commodity. But commodities are tangible and have utility; cryptocurrencies have neither. There is this somewhat awkward attempt to equate some of them with gold, hence limiting their supply like natural resources, or creating them through mining. Limiting supply by design is not the same thing as limited supply in nature (like gold) because (a) design can always be modified and hence such limitation is artificial, and (b) even if one cryptocurrency has limited supply, that limitation does not work for all cryptocurrencies taken together. Further, the fact that gold is mined does not in itself make it money, it has to be stamped and issued by a sovereign to make it money. If cryptocurrencies are neither a currency in the usual sense of the term nor a financial asset nor a physical asset what are they? The proponents have improvised to call them digital assets. Even that is doubtful as cryptocurrencies do not have any underlying use, like for instance car hiring software or core banking systems, or, for that matter, smartphones. That leads to the conclusion that it is an electronic code (with no practical use) which has created enough hype such that people are willing to pay money to buy ownership rights to that electronic code, seemingly in the hope that someone else would buy it at a higher price in future. What started as a medium of exchange has appeal similar to that of a speculative asset. As a store of value, cryptocurrencies like bitcoin have given impressive returns so far, but so did tulips in 17th century Netherlands. Cryptocurrencies are very much like a speculative or gambling contract working as a Ponzi scheme. It has been argued that the original scheme devised by Charles Ponzi in 1920 is better than cryptocurrencies from a social perspective. Even Ponzi schemes invest in income-earning assets. A bitcoin is akin to a zero-coupon perpetual; it’s like you paid money to buy a bond which pays no interest and which will never pay back the principal. A bond with similar cash flows would be valued at zero, which, can be argued as the fundamental value of a cryptocurrency. If everything eventually returns to its equilibrium value, then the prognosis for investors in cryptocurrencies is not a happy one.