Crypto Gains Tax: Crypto Tax: What Investors Need to Know

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It’s tax season, and for the first time, Indian crypto investors will be filing their earnings taxes and claiming TDS refunds, if any. The process will give regulators greater visibility into the rapidly growing Indian crypto market and help establish trust and transparency in the ecosystem.

For a taxpayer, there are new schedules to complete. Regular crypto traders doing multiple transactions might find the whole thing a bit overwhelming, and therefore it is advisable to seek the assistance of a qualified tax advisor. Nothing replaces a professional tax expert. Nevertheless, some things are worth keeping in mind.

All winnings are taxable The world of crypto, or virtual digital assets to use the official term, has financial activities beyond buying and selling the asset based on market movement. There are crypto-specific activities such as staking, in which an asset holder locks their crypto into the blockchain network to support their operations and earn rewards in return. Crypto itself comes in different forms. NFT or non-fungible tokens are a type of digital asset that represents ownership of an item, whether it is an artwork or symbolic form or a real-world asset. There are creators minting NFTs on the blockchain, often paying transaction fees, and there are collectors trading them.

According to the rules specified by the Indian government, the gains from all these crypto transactions are taxable at a flat rate of 30%. These rules, introduced in the 2022 Union Budget, are governed by Section 115BBH of the Income Tax Act 1961. As it stands, profits from one crypto trade cannot be offset by losses from another trade, or even another asset. Even receiving crypto as a gift is taxable subject to the prescribed threshold under the Income Tax Act 1961.

This means that users must have an accurate record of all their transactions for the financial year. This is essential for calculating capital gains or losses for each of these transactions and submitting taxes. If a user is trading on a recognized platform based in India, he can access these details in the profit and loss report provided by the platform. Claim your TDS refund In addition to capital gains tax, crypto transactions are also subject to a 1% withholding tax (TDS), under Section 194S of the Income Tax Act 1961. TDS, a withholding tax, establishes a transaction trail, providing regulators with insight into market activity. In the case of crypto, the TDS is applicable on all sale transactions above the threshold of Rs 10,000 during a financial year. This means that once a user’s total transaction exceeds the value of Rs 10,000 for the fiscal year, all sales transactions will incur a TDS of 1%. For specified persons, this threshold is 50,000 rupees. India-based crypto exchanges and platforms deduct this TDS on all applicable transactions and deposit the amount with the tax authorities on behalf of the users. These details can be found on Form 26AS as well as the TDS certificate that the platform provides to its users. Users can adjust the amount of TDS against tax obligations when filing their returns. According to a recent statement by the Union Minister of State for Finance to Rajya Sabha, a TDS of Rs 157.9 crore was lodged with the Crypto Transaction Tax Service as of March 20, 2023.

A point to make here is that in case a user has made peer-to-peer transactions outside of a platform, it is the responsibility of the individual to collect the TDS and file it with the tax authorities. Failure to pay or deposit TDS for crypto transactions will incur interest and penalties and is also punishable under the Income Tax Act.

If a taxpayer is unsure about any of these processes, it is always advisable to seek professional advice. Remember that the deadline for filing tax returns is July 31.

(The author is co-founder and COO, CoinSwitch)

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