In February 2022, the central government had decided to impose a 30 per cent tax on income from cryptocurrencies and a one per cent TDS on all crypto transactions. But that didn’t discourage many from trading in the virtual currency.
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As the deadline to file Income Tax returns (ITR) approaches, let us understand crypto taxation:
Understanding cryptocurrency
Cryptocurrency is a digital or virtual currency that uses cryptography for security. It is decentralised, meaning it is not controlled by any government or central authority. Instead, cryptocurrencies are based on blockchain technology, which is a distributed digital ledger that records transactions across a network of computers.
Cryptocurrencies are taxed as follows:
Flat 30 per cent tax on crypto gains
Under Section 115BBH of the Income Tax Act, any income derived from the transfer of VDAs, including cryptocurrencies, is subject to a flat tax rate of 30 per cent, plus applicable surcharges and cess.
Example: If you earn Rs. 100,000 from Bitcoin trading you will pay Rs. 30,000 as tax plus Rs. 1,200 as cess, a total of Rs. 31,200.
No offset of losses
Losses incurred from VDA transactions cannot be offset against gains from other VDAs or any other income. The only deduction allowed is the cost of acquisition of the VDA.
1 per cent TDS on crypto transactions
Effective from July 1, 2022, a 1 per cent Tax Deducted at Source (TDS) is applicable on the transfer of VDAs, subject to certain thresholds. Crypto exchanges are responsible for deducting the TDS on behalf of users, while in peer-to-peer transactions, the buyer must deduct and deposit the TDS.
Example: If you are selling Ethereum worth Rs. 60,000, the buyer deducts Rs. 600 as TDS and you will be paid Rs. 59,400.
Tax on mining cryptocurrency
Mining cryptocurrency involves using powerful computers or specialised hardware to verify and record transactions on a block chain network. In this network, miners, or nodes, compete to solve complex mathematical puzzles. The first miner to solve the puzzle earns a reward in the form of cryptocurrency, the amount of which varies by network.
The income earned from mining is taxed at a flat rate of 30 per cent. For tax purposes, the cost of acquisition for mined cryptocurrency is considered to be zero when calculating gains upon sale. Additionally, expenses such as electricity or infrastructure costs cannot be included in the cost of acquisition.
The tax rate on short-term and long-term gains is the same and applies to all types of income.
Example: Whether you hold Dogecoin for a month (short term) or a year (long term) and earn Rs. 200,000 of which you will pay Rs. 60,000 as tax plus Rs. 2,400 as cess, a total of Rs. 62,400.
Commercial and private investors:
Private and commercial investors are subject to the same tax rules.
Example: If a firm earns Rs. 500,000 from cryptocurrency trading, will pay Rs. 150,000 as tax plus Rs. 6,000 as cess, a total of Rs. 156,000.
“Tax on cryptocurrency ensures compliance and accountability in cryptocurrency transactions. Short-term and long-term gains are taxed at the same rate, treating cryptocurrency income on par with other forms of income. These tax provisions aim to regulate and streamline the taxation of cryptocurrency activities, promoting transparency and equitable tax treatment across different types of investors and transactions,” said Sathvik Vishwanath, Co-Founder & CEO, Unocoin.