Crypto Taxation in India: A Complete Guide to VDAs and Compliance

In today’s digital era, everyone is trading in various types of securities, including foreign stocks and digital currencies, but do you know what the tax consequences are for any earnings from these assets?

Let’s decode it:

Taxation of Cryptocurrency & Virtual Digital Assets (VDAs)

Section 2(47A) of the Income Tax Act, 1961, was introduced by the Finance Act 2022

‘Virtual Digital Asset’ means the following:

any information, code, number, or token generated through cryptographic means, providing a digital representation of value. This definition explicitly encompasses cryptocurrencies (Bitcoin, Ethereum, etc.), non-fungible tokens (NFTs), and any other digital asset notified by the Central Government, but excludes gift cards, mileage points, and Indian or foreign currencies.

Section: 115BBH

• Section 115 BBH specifically covers the taxation of the gain that arises from the transfer of the VDAs (Virtual digital asset) in the previous year.
• The VDA is taxed at special rate of 30% plus Health and education cess of 4%.
• For the deduction amount, only the cost of acquisition can be used. Inclusion of transaction cost, gas fees, commission, etc., is not allowed as a deduction
• The Loss from one VDA cannot be set off against the gain from another VDA. The same loss is not allowed to be set off from the income of another Head.
• The Loss from VDA can not be carried forward to the next financial year.
• No benefit of Basic Exemption limit

TDS under Section 194S

Section 194S mandates TDS @ 1% on consideration paid for transfer of VDAs, subject to specified thresholds:

• 50,000 per financial year: for specified persons (individuals/HUFs don’t have Business & profession income or have business turnover < Rs. 1 crore / gross receipts < Rs. 50 lakhs in preceding year)
• 10,000 per financial year: for all other persons

The obligation to deduct TDS lies with the buyer.

• For transactions on Indian exchanges, the exchange deducts and deposits TDS on behalf of buyers.
• For peer-to-peer (P2P) transactions and overseas exchange transactions, the individual buyer bears the compliance burden.
• When the buyer buys a VDA from the Miner/seller directly, the seller needs to deduct the TDS from the cash consideration paid. In case of consideration of Kind (Bitcoin in exchange for Dogecoin), the seller needs to ensure that the buyer has paid Tax equivalent to TDS of 1% accordingly

Gifts of VDAs

• VDAs received as gifts are taxable under Section 56(2)(x) as income from other sources at the fair market value if the aggregate value exceeds Rs. 50,000 in a financial year, unless received from specified relatives or on specified occasions (marriage, inheritance, etc)
• The recipient’s cost of acquisition for future transfer purposes is deemed to be the fair market value on the date of receipt.

Mining of Cryptocurrency

• Cryptocurrency obtained through mining is taxable as business income or income from other sources at the fair market value on the date of receipt.
• The mined coins are added to the inventory (for traders) or treated as capital assets. Upon subsequent sale, the gain over the FMV at the date of mining is taxed under Section 115BBH at 30%.

*Crypto Mining is the process of verifying the crypto transactions & recording them on the public digital ledger (the blockchain). In exchange, miners are rewarded with newly created crypto Coins

WHERE TO SHOW IN ITR

• The ITR forms (ITR-2 and ITR-3) include Schedule VDA for comprehensive disclosure.
• Taxpayers must report each transaction individually, including date of acquisition, date of transfer, cost of acquisition, sale consideration, and the head of income.