Cryptocurrency has garnered significant popularity and emerged as a new asset class, attracting numerous investors, including those in India. As this sector experiences rapid growth, regulations have struggled to keep pace.
In response, the Indian government took steps last year to regulate crypto assets, particularly in taxation, by imposing a tax rate of 30% (excluding surcharges and a 4% cess) on gains from crypto transactions. This tax rate applies to both short-term and long-term gains without any distinction.
Furthermore, starting from July last year, a 1% tax deductible at source (TDS) was introduced on crypto transactions. TDS deductions are required for any payment made to acquire cryptocurrencies. In the case of transactions conducted through centralised exchanges, the responsibility of deducting and depositing TDS lies with the exchange. However, no TDS is deducted when users deposit or withdraw money or cryptocurrencies from an exchange.
What does this mean for users? At a broader level, investors must exercise prudence and caution in managing their crypto assets and gain a better understanding of the prevailing norms. One of the critical challenges they face is determining the cost basis of their crypto assets, which refers to the amount paid or the fair market value of the cryptocurrency in Indian Rupees.
Sellers must subtract the cost basis from the sale price to calculate their profits or losses when selling crypto assets. Similarly, when disposing of crypto assets through trading or spending, the cost basis must be deducted from the fair market value on the disposal day.
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The need for clarity
Tax norms governing some crypto transactions require more clarity. For instance, when crypto assets acquired through mining, staking, or airdrops are sold, a 30% tax is levied on the entire consideration amount without allowing deductions for infrastructure costs. The government has recently initiated efforts to establish a tax regime for transactions involving Virtual Digital Assets (VDAs), including Non-Fungible Tokens (NFTs), cryptocurrencies, and Decentralised Finance (DeFi), signalling an expectation for increased regulation in this space.
Cracking the maze
Given the complexities surrounding crypto taxation, it is crucial to understand the tax norms and challenges. Investors should consider consulting tax professionals or utilising dedicated taxation platforms that can offer guidance on the tax implications of crypto activities.
Such platforms can help navigate the complexities of crypto taxation and ensure compliance with tax laws. Additionally, they can provide personalised advice based on individual situations, optimising tax obligations. It is vital as the deadline for filing Income Tax Returns (ITR) approaches. Accurate reporting of all crypto transactions is crucial. Investors should include details such as the date of the transaction, type of transaction, amount of cryptocurrency involved, fair market value in INR, and the purpose of the transaction in their filing.
Income received as a cryptocurrency for goods or services is taxable and should be reported on the tax return. The cryptocurrency's fair market value at the time of the transaction is used for tax purposes. Failure to report cryptocurrency income can lead to penalties and fines.
Donating cryptocurrency to registered charitable organisations can be claimed as a tax deduction, similar to regular filing. Furthermore, cryptocurrency forks, which occur when a blockchain splits into two separate chains, also have tax implications. The holder of the original cryptocurrency may receive an equal amount of the new cryptocurrency, which is considered taxable income. Therefore, keeping records of all cryptocurrency forks is crucial to ensure compliance.
To effectively navigate the complexities of crypto taxation, investors should opt for exchanges that comply with Indian laws regarding tax deduction at source (TDS) and record-keeping to ensure accurate reporting. They should maintain detailed records of all cryptocurrency transactions with the assistance of the exchanges, regularly updating and preserving transaction spreadsheets.
Compliance and more
It is important to note that the government can track investor trades in real-time and retrospectively. Therefore, investors should annually declare their gains from cryptocurrencies and NFTs, computing taxes with platforms that can consolidate transaction spreadsheets from multiple exchanges into comprehensive tax statements. The 1% TDS deducted during the year is offset against any tax payable on cryptocurrencies.
The TDS amount is remitted to the user if no additional tax is due. When filing the ITR, all crypto transactions must be reported. Investors should use Schedule VDA to report gains from crypto assets and disclose them adequately to avoid penalties and legal consequences.
Understanding capital gains tax and determining which gains fall under short-term or long-term capital gains based on the holding period is essential. Tax liabilities should be calculated accordingly and included in the tax return.
Staying updated on tax rules and any regulatory changes is crucial for effectively managing tax obligations. Avoiding informal or unregulated exchanges when dealing with crypto assets is advisable. Tax authorities may question the legitimacy of such transactions, making it challenging to establish acquisition costs and comply with tax obligations.
By consulting experts when needed and implementing best practices, investors can effectively manage their tax responsibilities, mitigate risks, and maintain a smooth relationship with tax authorities. Staying informed, reporting accurately, and complying with established tax regulations will ensure a hassle-free tax-filing experience for crypto investments.
Avinash Shekhar, CEO & Founder, TaxNodes