Virtual Currency Taxation

In the modern era of technology, we come across the new mode of transaction called “Virtual Currency”. This article will help you to better understand the nuances of virtual currency and it’s taxability in India.

What is Virtual Currency?

Virtual Digital Assets are those assets that have a value, can be stored, transferred and traded electronically. The financial budget of 2023 was the first time India brought in the law to regulate the transactions of such virtual digital assets under Section 115BBH.

Here are few examples of Virtual Currencies,

(I) Crypto Currencies

(II) Non-Fungible Tokens

(III) Decentralized Finance

Taxability of Virtual Currencies in India:

Based on the Budget 2023 and the clarifications stated in the further notices from Government. The taxability on

VDA (Virtual Digital Assets) shall be in the basis of:

(I) 30% of the tax of profit on trading, selling or spending crypto (+surcharge + 4% cess)

(II) 1% of TDS shall be deducted from such transactions if it exceeds Rs. 50,000 in one year or 10,000 in one transaction for Individual and HUF. (For others Rs. 10,000 for a year)

The Head of Income for VDA Incomes:

The nature of income from the Virtual Digital Assets can be categorised into two heads of income. i.e, Capital Gains and Business Income

The classification of head of income is based on the factor,

Capital Gains – if the assets are held for investment purposes.

Business Income – if the assets are held for trading purposes.

Cases when the VDA transactions won’t result in 30% of Tax:

(I) Gifting crypto – if you’re the recipient of the gift.

(II) Mining coins

(III) Getting paid in crypto.

(IV) Staking rewards.

(V) Airdrops

However, these shall be taxable under Individual Tax Rate on receipt.

TDS on Crypto Currencies (The Incidence of Taxation):

The burden of TDS deduction and remittance on VDA lies upon the persons stated below:

When the VDA is traded through Indian exchanges – Shall be deposited by the exchanges.

When the VDA is traded through P2P and International exchanged – Shall be deducted and deposited by the buyer in India.

In case of crypto to crypto transactions, the taxation will affect both buyer and seller to deduct TDS.

Form for Remittance of TDS on VDA:

In Case of Indian Exchanges:

The TDS shall be deducted and paid by the Indian Exchanges and the specified person* shall not deal with the duty of Tax remittances.

In Case of International Exchanges:

TDS in Form 26QE within 30 days from the end of the month in which TDS is deducted in case of P2P and transactions on international exchanges shall be made by the specified person. This form is currently not yet available for filing on the income tax portal.

All taxpayers other than a specified person are required to obtain TAN and shall furnish the return in Form 26Q on a quarterly basis and make TDS payment by the 7th of next month.

(*) A specified person refers to an individual or HUF (Hindu Undivided Family).

What is DeFi Income?

DeFi is a term used for a variety of financial products and services that run on decentralized blockchains.

DeFi applications are built to eliminate the middleman in financial transactions like banks.

Taxability of DeFi Income:

The ITD has not yet published any concrete recommendations regarding DeFi transactions. We must instead refer to the current Income Tax Act provisions for guidance. The following DeFi transactions may be subject to your specific tax rate after receipt:

(I) Earning new liquidity mining tokens, governance, or reward tokens

(II) Referral rewards

(III) Play to earn income

(IV) Browse to earn platforms like Permission.io or Brave

Crypto Losses:

(I) The losses incurred in the crypto transactions shall be set-off only against that specific cryptocurrency token.

For Example, The losses incurred in transaction Shiba Inu Coin shall only be set-off against the profit of Shiba Inu.

(II)The losses under crypto currency shall not be carried forward.

Other Information:

Donations made in crypto is taxable as a disposal of asset and perceived profits shall be treated as income and 30% shall be levied.

Crypto mining will be taxed at Income Tax slab rates instead of 30%. This income has to be paid on the amount on fair market value and once sold, the capital gains shall also be taxable.

GST is not currently applicable for Crypto transactions.