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Taxation of Crypto

By March 23, 2021January 4th, 20236 minute read

Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.

The crypto scene in India is still in its nascent stages. While the policymakers are still figuring out how to bring regulation in this space, Indian citizens have clearly shown interest in investing in crypto, as is evident from the number of users.

There is an estimated 10 million cryptocurrency users in India, and that globally would be 100 million.

Business Line (March 2021)

The Finance Bill 2022 has proposed to tax ‘digital assets’ from FY 2022-23 onwards. This creates an uncertainty regarding taxation of crypto prior to FY 2022-23. So, until there is some more clarity on the regulatory front, how should transactions in crypto be taxed? Before we dive deeper into the taxation aspect, let us see how crypto is viewed in the country.

Perception of Crypto

Today, many view crypto as a viable asset class for investment. The perception of crypto by its holder and policymakers do play a significant role in its taxation. Mr. Anurag Singh Thakur (Ministry of Information and Broadcasting) has also said that “the gains resulting from the transfer of cryptocurrencies/assets are subject to tax under a head of income, depending upon the nature of holding of the same.”

What do the tax laws say?

Taxation could be in 2 forms: Direct and Indirect. For direct taxation, the most relevant law is the Income Tax Act, 1961. For indirect taxation, the prevalent laws are the Central Goods and Services Tax (CGST) Act, 2017, and its State/Union Territory counterparts. Let us analyze these in detail:

Crypto vis-a-vis the Income Tax law

Let us divide the taxation of crypto vis-a-vis the period prior to FY 2022-23 and FY 2022-23 onwards.

Prior to FY 2022-23 (For FY 2021-22):

Anyone who has studied Indian taxation would tell you that there are five heads of income, namely Salary, House Property, Business (or Profession), Capital Gains, and Other Sources. Note that prior to the release of the Finance Bill 2022, nowhere in any tax laws are the terms ‘crypto’ or ‘cryptocurrency’ being used. Since most people view crypto as a means of investment, let us first analyze the capital gains aspect of the income tax law. 

Capital Gains:

The charging section of capital gains, Section 45 of the Income-tax Act, 1961, levies a tax on the profit or gain arising from the transfer of a ‘capital asset.’ Section 2(14), in its definition of the term ‘capital asset,’ states that it will include property of any kind held by an assessee, whether or not connected with his business or profession”. Since it appears to satisfy the chargeability criteria, let us proceed with the computation of tax. 

The computation of capital gains would generally be along the following lines:

Sale Consideration
(-)Expenditure wholly incurred in connection with the sale
Net Sale Consideration
(-)(Indexed) Cost of Acquisition
(-)(Indexed) Cost of Improvement
Capital Gains

The expenditure in connection with the sale would generally be in the nature of brokerage, if any, levied by the crypto exchange. There cannot be any cost of improvement in the case of crypto. The indexation benefit would be available only if the holding period was over 3 years (long-term). The short-term capital gains tax would be chargeable at the applicable slab rates, while the long-term capital gains tax would be chargeable at a flat rate of 20%.

What if you had mined the crypto instead of purchasing it? Would there be a clearly determinable cost of acquisition? Mining crypto profitably obviously requires significant hardware, electricity, and other costs. Can these costs be taken as the cost of acquisition? Can you accurately calculate such costs? If we were to utilize the rationale of the Hon’ble Supreme Court in CIT v. B.C. Srinivasa Shetty (1981), it can be concluded that it is possible to apply the provisions of section 48 (for computation of capital gain) only if the cost of acquisition is correctly ascertainable. Since it is not possible to ascertain the cost of acquisition accurately in the case of mining of crypto, it should not be chargeable to capital gains tax.


As mentioned earlier, in order to mine crypto profitably, a significant investment into the necessary infrastructure is required. If you have undertaken such an investment, could it still be said that the crypto you hold is merely a form of investment? This brings us into the second perspective, i.e., the taxpayer is engaged in the business of buying and selling crypto (including mining). The income from such business would be chargeable under the head ‘Profits and Gains from Business or Profession,’ and the calculation is relatively straightforward – treat the crypto as your inventory and calculate the net profit of your business according to the relevant provisions of the law. 

Other Sources:

Even if you do not view your crypto portfolio as your capital asset or your business, whatever income you derive from it would be taxable in the residual head of income – ‘Income from Other Sources.’ The tax would be chargeable at the applicable slab rates.

FY 2022-23 onwards:

The Finance Bill 2022 had announced matters relating to the taxation of crypto w.e.f. 01.04.2022. The crypto-related updates in the Finance Bill can be summarised as under: 

  • It has firstly used the term ‘virtual digital asset’ that includes what we generally understand as crypto and also NFTs. 
  • It has also included ‘virtual digital asset’ under the meaning of ‘property’ for the purposes of section 56(2) that deals with income from other sources. 
  • It has introduced section 115 BBH and 115 BBI that levies a flat rate of income earned from the transfer of the virtual asset, allowing only the purchase value as a deduction. No set-off of losses under this section is allowed against other heads of income.
  • Insertion of section 194S that mandates the deduction of tax at source @ 1% by the person responsible for paying the consideration if the consideration exceeds:
    • Rs. 50,000 when payee is a ‘specified person’
    • Rs. 10,000 in other cases.

However, more clarity on this is awaited.

Crypto vis-a-vis the GST law

The charging section of the CGST Act, section 9, states that Central GST shall be levied on all intra-state ‘supplies’ of ‘goods’ or ‘services’ or both. Thus for crypto-related transactions to be within the ambit of GST, it has to be a ‘supply’ of either ‘goods’ or ‘services.’ The CGST Act provides an inclusive definition of ‘supply’ under section 7, which hinges on the following factors:

  • There should be a ‘supply’ (this includes the sale, transfer, license, exchange, rental, lease, etc.)
  • There should be an agreement (could be oral, written, tacit, implied, etc.)
  • For a consideration
  • By a person
  • In the course or furtherance of business

The act of buying and selling crypto would meet all the criteria mentioned above. What remains to be seen is whether crypto would be either ‘goods’ or ‘services.’ The definition of the term “goods” in the act includes: “….every kind of movable property other than money and securities….” and the definition of services includes: “….anything other than goods, money, and securities…”. Thus, crypto would be covered under the definition of ‘services’ as given under the CGST Act, 2017. 

Based on the above, it can be concluded that crypto transactions are liable to GST. The applicable tax rate would be the residual tax rate of 18% used for services. However, a person is generally liable to registration under the GST law only if his aggregate turnover exceeds Rs. 20 lakh. 

The question of crypto mining remains. Crypto mining is the process of solving complex cryptographic equations that lead to the verification and entering of a crypto transaction into the blockchain network. More information about mining can be obtained here.

So here, you are providing the service of crypto mining and are also being awarded by the blockchain network for the same. It can be viewed as an outward supply of service chargeable to GST. The consideration for the same would obviously be ‘in kind’ (crypto), and the law has laid out procedures to calculate the value of supply in such cases. 

Looking forward

It is quite obvious that #IndiaWantsCrypto. The way forward would probably be to provide a little more clarity in the law with regards to its taxation. Given the public perception of crypto as a means of investment, if the same view is taken under the Income-tax laws, it might be treated as a capital asset with its own special rate of tax. Similarly, under GST law, if crypto could be treated on par with other securities like shares, debentures, etc., it could be kept out of the purview of GST to the extent of simply buying and selling crypto. The Finance Bill, 2022, while definitely making things a little more clear, still leaves uncertainties with regards to taxation of special events under crypto such as staking, forking, paying salaries in crypto, using crypto as a means of exchange for basic commodities, etc.

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.
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Tarish vasant

Tarish Vasant is a Chartered Accountant who believes that the typical role of a CA has to be reinvented to suit modern times. He has been writing in the field of finance and taxation for 3 years now and has decided to take the plunge with crypto too.


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