Taxation on Cryptocurrency, NFTs and Virtual Digital Asset (VDA)

Recent events are anything but encouraging for people investing in crypto. Additionally, authorities in India are not the most friendliest towards crypto asset class. For instance, the finance minister of India in her 2022 budget imposed 30% tax on crypto, disallowed any deductions & losses.

A lot of you have been lately asking questions around crypto tax reporting. So we decided to ease some of this pain by explaining everything taxes on crypto in as simple a manner as possible.

Let’s first understand what is Virtual Digital Asset (VDA)

A Virtual Digital Asset (VDA) has been officially defined as any information or code or number or token (other than Indian or foreign currency) providing a digital representation of value traded, which includes cryptocurrency, Non-Fungible Tokens (NFTs), and any other digital asset, notified by the central government.

My take on it,
Bureaucrats in India love coining new acronyms. VDA is nothing but mainly consists of Crypto & NFTs.

What is Cryptocurrency?

A cryptocurrency is a medium of exchange just like the rupee or a dollar in a digital form, there’s no coin, no silver, no gold, no paper, it’s just a transfer of digital assets.

It is free from any third party interference, and uses a decentralized system to track transactions, It means it is not backed by government or any central authority like other payment systems, where governments and banks handle it.

Instead of multiple banks keeping separate records, with crypto, one enormous spreadsheet of every transaction is made using that currency, which is called a Ledger.

So, by this, it ensures security, it becomes very easy to tell if anyone’s trying anything fishy.

What are NFTs?

NFT stands for Non-Fungible Tokens which means it can be neither replaced or interchange because of its unique properties.

Imagine buying a digital piece of art work on internet at some price and getting a digital token that shows your ownership of the artwork you bought. An NFT can be a music, a GIF, a film, or a story etc.

As everyone believed around the world, bitcoin as an alternative to digital currency ,similarly, nowadays NFTs are pitched as digital art work.

Tax treatment on Virtual Digital Asset (VDA)

  • As per section 115BBH of Income Tax, If a taxpayer has income from the transfer of VDA then it shall be taxed at a flat rate of 30%.

  • No deductions can be claimed in terms of expense or allowance in relation to the transfer of VDA. Taxpayers can only claim the cost of acquisition i.e. purchase price as a deduction from the income.

  • Taxable Income (Transfer of VDA) = Selling Price - Purchase Price

  • A gift of cryptocurrency, NFT, or other VDA is taxable in the hands of the receiver

  • Loss Treatment on VDA

    • Losses from the transfer of virtual digital assets cannot be set off against any other income and other virtual digital assets as well (inter-head and intra-head). Such losses cannot be carried forward too.
    • Losses under any other income head cannot be set off against this income
  • TDS on VDA

    As per section 194S, TDS should be deducted at 1% on payment if the transfer amount exceeds INR 50,000 (Individual/HUF payer having income from B&P) or INR 10,000 otherwise.

  • GST on VDA

    The sale of crypto, NFT, and VDA is taxable under the GST Act. It falls under the definition of goods. The seller must collect GST from the buyer and deposit it with the government under the category ‘others’ with a tax rate of 18% for reporting the sale of crypto.

Report Income under which head?

Currently, there’s no specific guidance to classify Income from the transfer of crypto, NFTs, etc. under the relevant Income head. One can declare and pay the applicable tax on your cryptocurrency-related income and profits as,

  • Capital gains, if held as investments,
  • Business income if held as stock in trade,
  • Considered as exempt income or IFOS if held as a gift, in the hands of the receiver.

Let’s wait for the Income Tax Department’s circular for the final word.

Is it mandatory to report income from cryptocurrency in your ITR?

Yes, it is advisable to report income from cryptocurrency transactions while filing Income Tax Returns, as in near future, there is a fair chance that all your crypto transactions get recorded in AIS. And even ITD had sent out notices to multiple taxpayers for not reporting the crypto trading in the ITRs under section 148A of the Income Tax Act. .

And the chance will be given to respond by sending an email with a justification. You are required to reply to the notice within the stipulated period.

Other than that you can also give an online response on the Income Tax website with relevant explanations and proofs.

You can read more about Income Tax on Cryptocurrency, NFT & VDA here.

I have Bitcoin income from trading activity. Is it taxable? If yes, how??

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.

Hey,

If I buy crypto and sell within the same year, what kind tax will be applicable at what rate or is there no tax?

@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

Hi,
Is it possible to sell the crypto for another person (the proceeds have gone to the other person’s savings account).

The account with the Crypto Exchange is of person A. The proceeds have gone to person B, who holds a joint savings account with person A.

Can the person B now show a short term gain/loss in her ITR?

Please let me know.

Thank you.

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!

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

Hello All, I am NRI. I hold crypto assets bought in foreign currency denominations (USD) and would like to sell and realize profits in INR. Due to the difference in the currency denominations between buy and sell of digital assets, how is the profit or loss calculated? If in profit, how is the tax calculated and to be paid?

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:

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 ?

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.