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Cryptocurrency tax compliance in India
- Vrinda Mathur
- Sep 02, 2024
Cryptocurrency has been a popular investment choice in recent years, allowing people to engage in the digital economy. However, as the usage of cryptocurrencies grows, tax authorities throughout the world are implementing measures to ensure correct reporting and compliance.
What is Crypto Tax?
Crypto taxes are primarily predicated on a 2014 IRS ruling that concluded cryptocurrency should be regarded as a capital asset, similar to stocks or bonds, rather than a currency, such as dollars or euros. This ruling has had far-reaching consequences for cryptocurrency owners, making them subject to more intricate taxation.
The IRS may have chosen to tax cryptocurrency as a capital asset because of how most people perceive it, according to Jeff Hoopes, an associate professor of accounting at the University of North Carolina and research director of the UNC Tax Centre. "I presume [the IRS] determined this because most individuals hold cryptocurrency as an investment, and we tax the appreciation of capital assets kept as investments," he explains.
Profits from trading, selling, or spending cryptocurrency will be taxed at 30%, with a 1% TDS tax applied on sales of crypto assets exceeding RS 50,000 (RS10,000 in some cases) in a single fiscal year. If you are found to be earning additional income in cryptocurrency, such as by staking or mining, you may be required to pay Income Tax upon receipt at your individual tax rate.
In recent years, the world of cryptocurrencies has grown significantly, leading governments throughout the world to respond and build regulatory frameworks. In India, cryptocurrency taxation has developed to reflect the shifting scenario. This detailed guide seeks to assist crypto investors and traders in navigating the difficult world of crypto taxation in India for 2024.
How is cryptocurrency taxed in India?
The ITD added Section 2(47A) to the Income Tax Act to define the term Virtual Digital Assets (VDAs). The definition is comprehensive, but it basically encompasses all types of crypto assets, such as cryptocurrencies, NFTs, tokens, and so on.
Section 115BBH was inserted in the 2022 budget by the Finance Minister. This clause imposes a 30% tax (with relevant surcharge and 4% cess) on income earned by trading cryptocurrencies on or after April 1, 2022.
This rate is equivalent to India's highest income tax band (without surcharge and cess). The tax rate applies to private investors, commercial traders, and anybody else who moves crypto assets within a particular fiscal year. Furthermore, the 30% tax rate will apply regardless of the nature of the income, so it makes no difference whether it is investment income or business income, and there is no distinction between short-term and long-term gains.
Crypto is not only subject to a 30% tax. Another part, 194S, imposes a 1% Tax at Source (TDS) on the transfer of crypto assets on or after July 1, 2022, if crypto transactions reach RS50,000 in a fiscal year (or RS10,000 in some situations), to ensure that all crypto transactions are tracked.
Indian investors who trade in cryptocurrency NFTs must declare their income as capital gains if the assets are held for investment reasons, or business income if the assets are held for trading purposes.
How to Calculate Crypto Tax?
The crypto tax is computed as a percentage of the income or gains from buying or selling cryptocurrency. The appropriate deductions will differ depending on whether the cryptocurrency transactions are reported as investments or company income.
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Determine your capital gain requirements
Individual tax agencies will typically tax capital gains at varying rates. In addition, certain countries may exempt or reduce the tax if specific conditions are met. For the purposes of this guide, we will use the Australian Tax Office (ATO) as an example. The ATO, like most other countries, will tax CGT at the individual's marginal tax rate, which is the highest rate of tax they will pay on their income. Let's call this 32.5% of John's financial status. In this instance, they will have to pay $455 on their crypto gains for this financial year.
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Collect crypto transaction activity reports
It is critical to preserve detailed, organized records of all cryptocurrency transactions wherever feasible. This simplifies the process of calculating cryptocurrency earnings and losses for taxation or other purposes. The information requested is referred to as a tax lot. A tax lot contains- Purchase/Sale Date, Cost basis (the fiat value at the moment of purchase, including transaction costs), Sale Price (in Fiat), Amount of cryptocurrency sold (in tokens or coins), Type of cryptocurrency sold.
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Determine the cost base
After obtaining all cryptocurrency transactions from the previous fiscal year, the individual must establish the "cost basis." This is the cryptocurrency's initial worth at the time of purchase, which includes transaction and gas fees. Let's imagine an investor bought $5,000 of Bitcoin in May. The exchange transaction fee was $80 and the BTC petrol fee was $20. As a result, the cost basis might be rounded up to $5,100, decreasing the investor's CGT obligations.
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Calculate the profit on cryptocurrency
Calculate your capital gains and losses using your whole transaction history. Let's look at some actual instances of how to match crypto trades and then calculate crypto taxes based on them.
If you buy cryptocurrency, trade it short-term for another coin, and then sell it long-term for fiat money, your capital gains tax calculation will be divided into short-term and long-term crypto trades held for less than or more than a year, respectively.
Conclusion
As India refines its regulatory environment for cryptocurrencies, investors must stay educated and follow the changing tax guidelines. With the addition of specialized sections of ITR forms, such as Schedule VDA, the government is aggressively tackling the issues created by the volatile cryptocurrency landscape. Understanding the details of taxable events, utilizing deductions, and complying with TDS regulations will allow Indian crypto investors to confidently manage the complexity of crypto taxation in 2024. Seeking professional guidance is recommended for optimal tax planning and compliance.
Also Read | Top Cryptocurrency Exchanges in India in 2024
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