In a significant development impacting the crypto community, India’s government has implemented new tax laws that were outlined in the Union Budget 2022. Starting April 1, 2022, individuals earning income through the transfer of Virtual Digital Assets (VDAs) are now subject to a 30% tax rate. Crypto tax in India is essentially now a big thing to consider.

It’s important to note that the government has clarified that no deductions will be allowed for expenses or allowances except the cost of acquisition. Additionally, the gains from selling one crypto asset cannot be offset by losses from another.

This blog explores these regulations’ implications and strategies for crypto tax planning and savings.

Understanding Crypto Taxation

According to Section 115BBH of the Income Tax Act, profits earned from the transfer of cryptos are taxed at a rate of 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 tax rate remains consistent for both short-term and long-term gains, encompassing all income generated from crypto investments. This means that trading, selling, or swapping crypto will be taxed at a flat 30% rate, along with a 4% surcharge, regardless of whether the income is categorised as capital gains or business income. 

Now, let’s explore which crypto transactions are liable to taxation in India. If you engage in any of the following activities, a 30% tax will be applicable:

1. Spending crypto to purchase goods or services. Spending crypto will be treated as a transfer of VDA and a TDS at 1% tax will apply.
2. Exchanging crypto for another crypto. In this respect, stable coins like USDT or BUSD are also considered crypto.
3. Trading crypto using fiat currency, such as ₹(INR).

While the 30% tax rate applies to trading, selling, or spending crypto, it’s important to note that other events in the crypto lifecycle are taxed differently. These transactions are subject to individual slab rates, and they include:

1. Receiving crypto as a gift.
2. Mining crypto.
3. Drawing a salary in crypto. This has a multifold interpretation; firstly, receipt of crypto as salary will be taxed as per normal slab rates. Secondly, when such crypto is sold, it will be taxed at a flat 30%.
4. Staking crypto and earning stake benefits.
5. Receiving airdrops.

In all the above cases, the ultimate sale of VDAs will attract a tax of 30%. 

For example- If one receives BTC worth ₹10,00,000 as salary or airdrop, in such case ₹10,00,000 will be taxed as per normal slab rates. Further, if the one sells such BTC for ₹15,00,000 then in such a case ₹10,00,000 will be considered as cost of acquisition and gains of ₹5,00,000 will be taxed at 30%. 

Key Strategies of Crypto Tax Planning in India

The current law does not permit many avenues to save tax; however, a few practical strategies may help to optimise tax liabilities.

Plan and Hold Investments Long-Term (HODL)

A simple yet effective approach to saving on crypto taxes is planning and holding investments for more than a year. This allows investors to capture the value appreciations in their holdings over time and it minimises the risk of short-term market fluctuations. Another major advantage is that there will be practically 0 tax if investments are not liquidated.

Utilise Crypto Tax Software and Take Professional Help

Calculating taxes on your crypto income is complex, but using dedicated tax software like TaxNodes built by finance and tax professionals can simplify it significantly. By leveraging a crypto tax software, you can automate the calculation of gains and losses, saving valuable time and potentially reducing costs. These programs can also assist in implementing other tax-saving strategies, providing a comprehensive solution for managing your crypto taxes.

Explore Gifting Crypto to Family Members

Lower your crypto tax bill by gifting crypto to your family members. A plain reading of the law suggests that the ambit of the crypto tax does not extend to provisions of gifts between relatives and is hence tax-free. It is important to remember that, generally, VDA gifts up to ₹50,000 are not taxable. However, it’s crucial to consult with a Chartered Accountant (CA) and gain a comprehensive understanding of the intricacies involved in this strategy.

Mining

An investor who is involved in full-time mining of cryptocurrency can set up a legal entity like a Private Limited company and get it registered with the authorities. This way, any income from his mining business will be considered as his business income and he can charge expenses concerning running his mining farm in the statement of Profit and Loss account. 

TDS on VDAs

A taxpayer shall take into consideration the following TDS implications while entering into crypto transactions:

•  As per Section 194S of the Income Tax Act, TDS @ 1% will be deducted on any Virtual Digital Asset (crypto/NFTs) transfer.
• The authorities have mandated that Indian exchanges comply with TDS provisions in every transaction.
• However, the scenario changes if an Indian resident enters into a P2P transaction at a place other than Indian exchanges, the burden of TDS compliance including deduction and deposit of TDS amount with the government will be on such Indian residents.
• Nonetheless, TDS liability arises when the payment for the transaction exceeds ₹50,000 during a financial year in the case of specified persons and ₹10,000 in other cases. 

Conclusion

In India, there is a lack of specific tax-saving options tailored specifically for income generated from VDAs. This presents a challenge for investors as they have limited avenues to legally optimise their tax liabilities. Therefore, understanding crypto taxation nuances and seeking professional advice is crucial for successfully navigating this evolving regulatory landscape.

Furthermore, leveraging tools like the TaxNodes calculator enables crypto investors to efficiently plan and save taxes on their crypto income while seamlessly filing their income tax returns (ITR). With careful planning, informed decision-making, and the right tools, individuals can ensure compliance with tax regulations and maximise their savings in crypto taxes.