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In the ever-evolving world of cryptocurrencies, there are various avenues for individuals and businesses to generate income. Each method presents unique opportunities and challenges, from trading and staking to mining and airdrops. First, however, it’s crucial to understand the tax implications associated with these different sources of crypto income.
This blog will explore the basics of cryptocurrency trading and staking, mining, airdrops, and special cases such as salaries, consultancy fees, and interest income. We will also delve into the tax regulations in India that apply to each source of crypto income.
Trading
Cryptocurrency trading refers to the buying, selling and exchanging of digital currencies through various online platforms. Cryptocurrencies, such as Bitcoin and Ethereum, operate on decentralised blockchain technology, enabling secure and transparent transactions without the need for intermediaries like banks.
A trader, with the help of careful analysis and risk management strategies, can take advantage of fluctuations in the crypto market to generate profits.
Taxation on Crypto Trading
According to Section 115BBH of the Income Tax Act, profits earned from trading crypto are taxed at 30% and a 4% cess. Additionally, Section 194S mandates a 1% Tax Deducted at Source (TDS) on crypto asset transfers exceeding ₹50,000 (or even ₹10,000 in certain cases) within the same financial year, starting from July 01, 2022. It’s important to note that these taxes apply to all private or commercial investors engaging in digital asset transfers throughout the year.
The Union Budget, 2023 added Schedule VDA, which consists of details regarding the cost of acquisition, sale proceeds and duration of holding VDAs. Therefore, the taxpayer must ensure complete disclosures are made in such a schedule when filing ITR.
Income from crypto staking
Staking is a process that allows crypto holders to participate in network validation in return for earning passive income. Participants are rewarded with additional tokens or transaction fees in return for their contribution. The rewards are identical in nature to the interest income earned on a savings account balance. In addition, Staking provides an alternative to traditional mining, offering a more energy-efficient and environmentally friendly approach.
Taxation on Staking Rewards
The income from staking is considered income from other sources and is subject to taxation at the regular slab rates. The taxable amount will be based on the FMV of the received tokens in Indian Rupees (INR) on the day of receipt. Furthermore, when you decide to sell, swap or spend your staking rewards later, you will be responsible for paying a 30% tax on any profits.
Then the details of the same shall be disclosed in Schedule VDA at the time of filing ITR.
Mining
Mining involves verifying and recording transactions on a blockchain network using high-performance computers or specialised mining hardware. Within the blockchain network, a group of nodes or computers known as miners compete to solve intricate mathematical problems to validate transactions. The miner who successfully solves the puzzle first is granted a specific amount of cryptocurrency as a reward, the exact value of which depends on the particular blockchain network.
Taxation on Crypto Mining
If mining serves as the primary business activity of the entity, the income will be subject to taxation under the ‘Business Income’ category. In such cases, individuals operating a mining farm are eligible to deduct expenses related to running the farm.
The rewards of mining will be considered as business assets of the miner. Furthermore, if the miner holds such rewards as investments, such will be regarded as capital assets.
Upon selling these cryptocurrencies at a subsequent stage, the income arising therefrom to the miner will be taxed at the rate of 30%. In computing the income arising therefrom, the formula shall be sale price received less cost price. The cost price shall be the cryptocurrency’s fair market value determined at the time of receipt.
The mining income should be disclosed in the business’s financial statements and the same will be considered when filing ITR.
Airdrop
Airdrops have become famous for distributing digital tokens to a broad audience. In this unique process, crypto projects distribute free tokens to existing holders or new participants as a promotional strategy. Airdrops can serve multiple purposes, such as creating awareness, rewarding community engagement, or incentivising adoption.
Taxation on Airdrop
Receiving Airdrops without consideration shall be considered income from other sources. The value of such Airdrop shall be fair market value on the date of receipt. Additionally, any expenditure incurred by the customer towards receiving Airdrop shall be allowed as a deduction.
Upon the sale of the cryptocurrency at a subsequent stage, the income arising shall be taxable at 30%. In computing the income arising therefrom, the formula shall be the sale price received less the cost price of VDAs. The cost price shall be the fair market value of the Airdrops determined at the time of its receipt.
Special cases
Companies whose major source of income is cryptocurrencies tend to settle their overheads like salaries, consultancy fees, and interest on loans by using cryptocurrencies.
Salary
Where an Indian resident receives crypto as salary, the same shall be included in total income as Income from Salaries. One may value such crypto at their fair market value on the date of receipt. Additionally, the employee shall not be allowed to claim any expenditure except the ones mentioned in section 16 of the IT act.
Consultancy fees
Where an Indian resident receives crypto as consultancy fees, the same shall be included in total income as Business Income. One may value such VDAs at their fair market value on the date of receipt. Any expenditure incurred for providing such consultancy services shall also be allowed as a deduction.
Interest income
Where an Indian resident advances loans in terms of crypto, the same shall be considered debt in the hands of the borrower accordingly; interest received against such loan shall be included in the total income as Income from Other Sources and shall be taxable accordingly. The value of such VDAs received as interest shall be valued at the fair market value on the date of receipt. Any expenditure incurred in terms of such loan shall be allowed as a deduction as per section 57 of the IT Act.
Under the circumstance where crypto received under above mentioned special cases are held as investments, then in such a case at the time of subsequent sale, the gross profits will be taxed @ 30%.
Conclusion
In conclusion, exploring different sources of crypto income can be a lucrative endeavour in digital currencies. Individuals have various avenues to earn passive income from their crypto holdings, whether through mining, staking, lending, or even participating on decentralised finance (DeFi) platforms.
When it comes to tax obligations related to crypto income, navigating the complexities can be daunting. Fortunately, TaxNodes provides a streamlined solution by simplifying the process of computing taxes on crypto income. With the platform’s user-friendly interface, accurate reports can be generated and expert assistance is readily available to ensure compliance and peace of mind. So, make the most of your crypto income while experiencing a hassle-free tax filing with TaxNodes.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
