Unraveling the knots of crypto taxation for tax filers

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Cryptocurrency has gained considerable popularity and has become a new asset class, attracting many investors, including those in India. While this sector is growing rapidly, regulation has struggled to keep pace.

In response, the Indian government took steps last year to regulate crypto assets, including taxation, by imposing a 30% tax rate (excluding surcharges and a 4% tax) on gains from crypto transactions. This tax rate applies to both short-term and long-term capital gains without any distinction.

Additionally, from July last year, a 1% withholding tax deduction (TDS) was introduced on crypto transactions. TDS deductions are required for any payment made to acquire cryptocurrencies. In the case of transactions conducted through centralized exchanges, the responsibility for deducting and depositing TDS rests 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? On a broader level, investors need to exercise care and caution in managing their crypto assets and better understand the prevailing standards. 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 need to subtract the cost basis from the sale price to calculate their profit or loss when selling crypto assets. Similarly, when disposing of crypto assets through exchanges or expenses, the cost basis must be deducted from the fair market value on the day of the disposal.

READ ALSO: Income tax return: how to calculate tax on gains generated by crypto transactions?

The need for clarity

The tax standards governing certain crypto transactions need more clarity. For example, when crypto assets acquired through mining, staking, or airdrops are sold, a 30% tax is levied on the full amount of the consideration without allowing deductions for infrastructure costs. The government recently launched efforts to establish a tax regime for transactions involving virtual digital assets (VDAs), including non-fungible tokens (NFTs), cryptocurrencies and decentralized finance (DeFi), signaling an expectation of increased regulation in this space.

Break the maze

Given the complexity of crypto taxation, understanding the tax standards and challenges is crucial. Investors should consider consulting tax professionals or using dedicated tax platforms that can offer advice on the tax implications of crypto activities.

These platforms can help navigate the complexities of crypto taxation and ensure compliance with tax laws. In addition, they can provide personalized advice based on individual situations, optimizing tax obligations. This is essential as the tax return filing deadline (ITR) approaches. Accurate reporting of all crypto transactions is crucial. Investors should include details such as date of transaction, type of transaction, amount of cryptocurrency involved, fair market value in INR, and purpose of transaction in their records.

Income received as cryptocurrency for goods or services is taxable and must be reported on the tax return. The fair market value of the cryptocurrency at the time of the transaction is used for tax purposes. Failure to report cryptocurrency income can result in penalties and fines.

Donating cryptocurrency to registered charities can be claimed as a tax deduction, similar to regular depositing. Additionally, 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 essential to ensure compliance.

To effectively navigate the complexities of crypto taxation, investors should opt for exchanges that comply with Indian laws regarding withholding tax deduction (TDS) and record keeping to ensure accurate reporting. They must keep detailed records of all cryptocurrency transactions with the help of exchanges, regularly updating and preserving transaction spreadsheets.

Compliance and more

Importantly, the government can track investor transactions in real time and retrospectively. Therefore, investors must report their earnings from cryptocurrencies and NFTs annually, calculating taxes with platforms capable of consolidating trade spreadsheets from multiple exchanges into comprehensive tax returns. The 1% TDS deducted during the year is deducted from any tax payable on cryptocurrencies.

The TDS amount is returned to the user if no additional tax is due. When filing the RTI, all crypto transactions must be reported. Investors should use Annex VDA to report gains from crypto assets and disclose them adequately to avoid penalties and legal consequences.

It is essential to understand capital gains tax and determine which gains fall under short-term or long-term capital gains depending on the holding period. Tax liabilities must be calculated accordingly and included in the tax return.

Keeping abreast of tax rules and any regulatory changes is essential to managing tax obligations effectively. It is advisable to avoid informal or unregulated exchanges when dealing with crypto assets. Tax authorities may question the legitimacy of such transactions, making it difficult to establish acquisition costs and comply with tax obligations.

By consulting experts as needed and implementing best practices, investors can effectively manage their tax responsibilities, mitigate risk and maintain a smooth relationship with tax authorities. Staying informed, reporting accurately, and complying with established tax regulations will ensure a hassle-free tax reporting experience for crypto investments.

Avinash Shekhar, CEO and Founder, TaxNodes

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