Everything You Need to Know About India’s Crypto Tax

crypto tax in india

Digital currency and assets such as NFTs (non-fungible tokens) have gained popularity around the world in recent years. Trading in these assets has expanded dramatically since the opening of cryptocurrency exchanges. India, on the other hand, lacked a defined policy for regulating or taxing such asset classes.

Our Finance Minister, Ms Nirmala Sitharaman, suggested a new section 115BBH to charge income tax on Cryptocurrencies and other virtual assets in the Union Budget 2022-23. According to the Union Budget Memorandum for 2022-23, “The proposed section 115BBH proposes that, where an assessee’s total income includes any income from the transfer of any virtual digital asset, the income tax payable is the sum of the amount of income tax calculated at a rate of 30% on the income from the transfer of any virtual digital asset. The amount of income tax that the assessee would have been liable for if the assessee’s total income had been reduced by the sum of the income from virtual digital asset transfers.”

What Is Cryptocurrency and How Does It Work?

Cryptocurrency is a digital asset that is often decentralised and designed to be utilised through the internet. Bitcoin was the first cryptocurrency, launching in 2008, and it is still the most popular, influential, and well-known.

The everyday money we use (the rupee) is known as centralised money, and it is handled by institutions like the Reserve Bank of India (RBI). Decentralisation in the context of cryptocurrencies means that no single authority can be held responsible for the rise and fall of a particular cryptocurrency.

Peer-to-peer networks of computers running free, open-source software are commonly used to maintain cryptocurrencies. In most cases, anyone who chooses to participate is able to do so. Many of you are probably asking how crypto is secure without the involvement of a bank or government. It’s secure because blockchain technology verifies all transactions. A cryptocurrency blockchain’s balance sheet or ledger is similar to that of a bank. Each currency has its own blockchain, which is a continuously re-verified record of all transactions made with that money. The purpose of encryption is to provide protection and safety to crypto investors.

Because cryptocurrency is an intangible asset, everybody who has it has an intangible asset in their portfolio. What you possess is a key that enables you to transfer a record or a unit of measurement from one person to another without the involvement of a trustworthy third party. The status of cryptocurrencies in India was essentially undefined until the implementation of a crypto tax, which was announced in the Union Budget for FY 2022-23.

Taxes on Cryptocurrencies: What Are They and How Do They Work?

How crypto taxes operate is one of the most crucial topics in India investors should understand before investing in cryptocurrency. Furthermore, investors should be aware that the classification of cryptocurrencies differs depending on which federal government body is in charge of overseeing investment activities.

In 2014, the Internal Revenue Service (IRS) of India provided recommendations to assist individuals and corporations in determining how the government handles bitcoin taxes. The term “virtual currency” was used in this notice to describe cryptocurrencies. Despite their moniker, cryptocurrencies are not considered currency by the IRS. Cryptocurrency transactions, like stocks, bonds, and other capital assets, are instead considered as property. As a result, everyone who uses, sells, or is paid in cryptocurrency is typically compelled to pay crypto taxes on it.

Although the IRS department in India considers cryptocurrencies to be property for tax reasons, this classification is not shared by all federal agencies.

When it comes to regulating a number of crypto-related trading markets, the Commodity Futures Trading Commission (CFTC) considers cryptocurrency as commodities. The CFTC regulates cryptocurrencies when they’re “used in a derivatives transaction, or if there’s fraud or manipulation involving a virtual currency traded in interstate commerce,” according to the agency’s website. The Securities and Exchange Commission (SEC) in the United States, on the other hand, has the authority to regulate cryptocurrencies as securities, and investors may be subject to securities regulations.

What are the crypto tax implications in India?

You’ll make capital gains or losses if you buy, sell, or exchange cryptocurrency. Your gain may be short-term or long-term, depending on how long you kept the bitcoin before selling or trading it, much like other IRS-taxed assets.

If you possessed the cryptocurrency for less than a year before spending or selling it, any profits are usually considered short-term capital gains and are taxed at your regular income rate.

If you owned the cryptocurrency for more than a year, any earnings are likely to be long-term capital gains, which are taxed at a higher rate.

To compute your capital gains taxes on short-term capital gains or regular income obtained through crypto activities, use the table below: Although the IRS considers cryptocurrencies to be property for tax reasons, this classification is not shared by all federal agencies.

When it comes to regulating a number of crypto-related trading markets, the Commodity Futures Trading Commission (CFTC) considers cryptocurrency as commodities. The CFTC regulates cryptocurrencies when they’re “used in a derivatives transaction, or if there’s fraud or manipulation involving a virtual currency traded in interstate commerce,” according to the agency’s website. The Securities and Exchange Commission (SEC) in the United States, on the other hand, has the authority to regulate cryptocurrencies as securities, and investors may be subject to securities regulations.

2021 Short-Term Capital Gains Tax Rates

Tax Rate10%12%22%24%32%35%37%
Filing StatusTaxable Income
SingleUp to $9,950$9,951 to $40,525$40,526 to $86,375$86,376 to $164,925$164,926 to $209,425$209,425 to $523,600Over $526,601
Head of householdUp to $14,200$14,201 to $54,200$54,201 to $86,350$86,351 to $164,900$164,901 to $209,400$209,401 to $523,600Over $523,600
Married filing jointlyUp to $19,900$19,901 to $81,050$81,051 to $172,750$172,751 to $329,850$329,851 to $418,850$418,851 to $628,300Over $628,301
Married filing separatelyUp to $9,950$9,951 to $40,525$40,526 to $86,375$86,376 to $164,925$164,926 to $209,425$209,426 to $314,150Over $314,151

2021 Long-Term Capital Gains Tax Rates

Tax Rate0%15%20%
Filing StatusTaxable Income
SingleUp to $40,400$40,401 to $445,850Over $445,850
Head of householdUp to $54,100$54,101 to $473,750Over $473,750
Married filing jointlyUp to $80,800$80,801 to $501,600Over $501,600
Married filing separatelyUp to $40,400$40,401 to $250,800Over $250,800

You can also make money from cryptocurrency-related activities. This is considered ordinary income and is taxed at your marginal tax rate, which might be anywhere from 10% to 37%.

How to determine gains in crypto?

Long-term and short-term gains and losses are the two types of gains and losses that occur when you buy and sell capital assets. In terms of the tax repercussions you’ll face, the IRS handles these two classifications extremely differently.

  • Capital gains and losses from the sale of property held for less than a year are known as short-term capital gains and losses. In 2021, these profits will be taxed as ordinary income, with rates ranging from 10% to 37%.
  • Long-term capital gains and losses arise from the sale of property held for more than a year, and they are normally taxed at advantageous long-term capital gains rates of 0%, 15%, or 20% in 2021.

You begin by identifying your cost basis in the property when calculating your gain or loss. This is the amount you paid, adjusted (reduced) by any fees or commissions you paid to participate in the transaction. Your modified cost basis refers to this ultimate cost.

Then you calculate the sale price and subtract any fees or commissions you paid to complete the deal. Finally, you calculate the difference by subtracting your adjusted cost basis from the adjusted sale value, resulting in a capital gain if the amount exceeds your adjusted cost basis or a capital loss if it is less than your adjusted cost basis. You can use a Crypto Tax Calculator to estimate how much tax you would owe based on your crypto capital gains or losses.

Buying or selling cryptocurrency as an investment:

Purchasing cryptocurrency isn’t a taxable transaction in and of itself. Even if the value of your investment increases, you can opt to buy and retain bitcoin for as long as you like without paying taxes on it. When you sell, trade, or dispose of your cryptocurrency investments in any way that results in a gain in your taxable accounts, you must pay taxes. If you trade bitcoin in a tax-deferred or tax-free account, such as an individual retirement account, this does not apply (IRA).

For example, if you acquire $1,000 in Bitcoin and then sell it for $1,200, you must report the $200 profit on your taxes. The capital gain, whether short-term or long-term, will be determined by how long you’ve kept the bitcoin. If you sold the same $1,000 worth of Bitcoin for $800 instead, you’d make a loss that might balance other profits and save you up to $3,000 in taxes each year. Any unused loss can be carried forward to offset future gains or up to $3,000 of taxable income in a given year.

Mining cryptocurrency:

Cryptocurrency mining is the process of validating and adding cryptocurrency transactions to a blockchain by solving cryptographic hash functions. Miners are compensated with cryptocurrency in exchange for their efforts.

Mining cryptocurrency earns you taxable income, which could be reported on Form 1099-NEC at the fair market value of the cryptocurrency on the day you got it. Even if you don’t receive a 1099 form, you must report this since the IRS considers it taxable income. If you receive cryptocurrency in exchange for goods or services, follow these steps:

Bitcoin and other cryptocurrencies are now accepted by a large number of businesses. If you receive cryptocurrencies in exchange for products or services, the payment is taxable income, just like if you received cash, check, credit card, or digital wallet payment. For tax purposes, the dollar value of goods or services you receive is equivalent to the cryptocurrency’s fair market value on the day and time you received it.

Staking Cryptocurrency:

Staking cryptocurrencies is a method of earning incentives for keeping them while also offering a built-in investor and user base to help the coin gain value. Staking cryptocurrencies earns you money in the same way that saving money earns you money. You can be paid money that counts as taxable income in exchange for staking your virtual currencies. Staking revenue is treated the same way as mining income: it is valued at fair market value at the time it is earned.

Can crypto trading be tax free?

Depending on the transaction, the account you transact in, your income, and your filing status, you may be able to make tax-free crypto transactions in certain circumstances.

Buying bitcoin does not result in a taxable event, even if the value rises over time. Buying and holding bitcoin has no tax implications unless you decide to sell or exchange it. Crypto transactions made in a tax-deferred or tax-free account, such as a Traditional or Roth IRA, are not taxed in the same way they would be in a brokerage account. These transactions are tax-free.

If your table income is less than or equal to $40,400 if you file as a single person, as married, filing separately, or if your taxable income is less than or equal to $80,800 if you file jointly as a married couple, you can also avoid paying taxes on long-term capital gains realised by selling your cryptocurrency.

How to File Cryptocurrency Taxes?

The most important thing for investors and businesses to realise is that they must record their crypto holdings, gains, and losses to the IRS when submitting their taxes. If you receive a cryptocurrency return, whether positive or negative, or any form of income from your holdings, you must disclose it to the IRS. This is why it’s critical to maintain track of all cryptocurrency transactions.

The following are the essential processes to follow when filing taxes on cryptocurrencies.

• Figure out what you owe, if anything. It’s conceivable that an investor who executed a crypto transaction from the list above incurred a tax burden.

 • Keep track of and report on transactions. You must declare any cryptocurrency transactions on your tax return. The IRS requires this paper trail, just as it does with stocks and other investments, to guarantee that an individual declares their whole tax burden. In most cases, a crypto exchange will offer the investor with their transaction history.

• Make sure you include all of the necessary forms with your tax return. The IRS demands different papers based on what an individual has done with their cryptocurrency. Calculating capital gains or losses on Form 8949 and reporting the results on Schedule D of Form 1040, which outlines and summarises capital gains or losses, is one example.

In summary, The Internal Revenue Service is focusing more on ensuring that bitcoin investors pay their taxes. This is something investors should bear in mind, especially since bitcoin tax circumstances are complex and complicated. Cryptocurrency transactions and investments may be taxed as property, similar to stocks, or as income, depending on the circumstances. Managing your bitcoin tax liabilities shouldn’t be too tough provided you maintain track of your crypto assets and transactions. If you feel like you’re in over your head, you can and should always seek expert help.

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