Profits from Cryptocurrencies are taxable in India. Their unregulated status may confuse people, but the standard Income Tax laws apply to them as the Income Tax Act says all incomes are taxable. It means income from any source whether legal or illegal is taxable.
Different scenarios are discussed below to give you a holistic understanding of the system.
- 1 Do you have to pay Tax on Crypto?
- 2 Do you have to pay tax on profits generated from Airdrops, Play-to-Win games like Axie Infinity?
- 3 Do you have to pay tax on crypto received as Payment for Services?
- 4 Calculating Income Tax on Crypto Investing and Trading
- 5 Receiving Crypto as Payments for a Business
- 6 GST on Crypto Payments
- 7 Booking Loss during the Financial Year
- 8 Filing Income Tax Return
- 9 What If I receive a Salary in Crypto from an Overseas Company?
- 10 What if I have Not Paid Taxes on the Salary Received in Crypto?
- 11 Tax on NFT Trading
- 12 Income Tax on Crypto-to-Crypto Trading
- 13 Income Tax on Staking and Lending Rewards
- 14 Showing Crypto on the Balance Sheet
- 15 Income Tax on Crypto Mining
- 16 Advanced Tax
- 17 Amending Tax Returns
- 18 Is Income Tax payable only when crypto is realized in INR?
- 19 I do not have my trading history. How to get it?
- 20 Is Commission or referral income taxable under GST?
Do you have to pay Tax on Crypto?
Yes, as mentioned above, Cryptocurrencies are taxable.
Income Tax has to be paid if a person has earned income regardless of the legality of the source.
Do you have to pay tax on profits generated from Airdrops, Play-to-Win games like Axie Infinity?
Tax is payable in this case too. It has to be paid during the year in which income is generated.
Do you have to pay tax on crypto received as Payment for Services?
Crypto here is a means of payment. The nature of service(s) rendered does not change.
For example, a digital marketing freelancer might be providing services to both domestic and foreign clients and receive payments in fiat currencies like INR or USD.
The freelancer can also be paid in cryptocurrencies, but the nature of the transaction remains the same, which is a business activity in this case. So, it will be taxed as income generated from the business.
Calculating Income Tax on Crypto Investing and Trading
Crypto trading and investing are two different concepts. Trading involves buying and selling crypto assets regularly to make a profit from the price change in a short period of time and repeating this process frequently. On the other hand, investors can either be short-term or long-term investors. As the name suggests, these investors either hold an asset for the short or long term but the idea is to be a frequent trader.
Derivatives such as futures, options trading is to be considered trading and not investing.
Calculating tax as an Investor
Investors are differentiated based on the time they hold on to a given asset.
Less than 36 months- Short Term Capital Gains Tax
Short Term Capital Gains Tax slabs depending on the Total Income a person has generated in a financial year from sales of invested assets within 3 years of its purchase. Whatever is the tax rate applicable to the other incomes earned during the year applies to the Short Term Capital Gains.
Profit = Sales Price – Cost of Acquisition – Commission or brokerage
More than 36 months- Long Term Capital Gains Tax (LTCG)
If the investor is selling the asset(s) after three years of its acquisition, the Long Term Capital Gains Tax applies to the profit(s) generated from it. For LTCG the basic tax rate is 20%.
Here, the taxpayer also gets the benefit of indexation.
The Cost Inflation Index can tell an investor about the present value of the asset in consideration. The present value can be seen as the cost of acquisition. This reduces the taxable profit to some extent.
The Cost Inflation Index is constant and flat for all the capital assets. There are no specific indices for different types of assets.
The Cost Inflation Index can be referred to only in the case of LTCG.
Profit = Sales Price – Cost of Acquisition – Commission or brokerage – (Cost inflation index * Cost of acquisition)
Income Tax on Crypto Trading
Taxable income = Profit made from all of the trades during the year
Trading is considered as running a commercial business or undertaking. So, it creates business income.
The day you receive profit in a transaction, book it and enter into your accounts the profit made. Make the calculation on the same day’s price so that the price volatility may not cause any confusion.
For instance, in a span of a couple of days you bought and sold Bitcoin and made a profit of 100 INR, the applicable tax rate can be anywhere between 0-30%, depending on your total income.
Receiving Crypto as Payments for a Business
Payments can be made in several forms. They need not come in fiat currency such as INR or USD.
They can come both in the form of currency or assets like gold or diamond or crypto.
Even a payment received in the form of a voucher or gift card for an e-commerce website is taxable.
Only specific incomes like agriculture are tax exempt. So, unless it is explicitly specified, your income is taxable.
Regardless of the way payment was made, taxes are owed to the Government as the Income Tax Act says all incomes are taxable. As discussed, income from a business is taxable.
As per the Income Tax Act and general accounting rules, you are supposed to book or account for incomes before the two steps of Receipt and Accrual.
If someone is not paying taxes on the cryptocurrencies received and booking profits at a later date, he or she can be penalized according to the laws. You can only invest the amount left after the tax is deducted.
For instance, you may receive a Bitcoin payment equal to INR 100. And, hypothetically we can assume the applicable tax rate is 30%. Then you can show only INR 70 as profit and then invest it.
You cannot directly invest the whole of INR 100. The tax amount has to be kept in books.
If the whole INR 100 is invested, it means the INR 30, the share of the Government, is also invested without their approval and informing them.
It can cause issues once the asset is sold at a later date. Officials can question the investor about the source of funds which could cause trouble.
Only invest the amount reached after deducting the taxes.
GST on Crypto Payments
GST is an Indirect Tax. Indirect Taxes are consumption-based taxes.
It means GST is applicable if the consumer is based in India.
Goods or services provided to a client based in the foreign territory are considered an export.
GST is not applicable to exports.
So, if the consumer is based out of India, GST cannot be charged.
However, in order to prove that you are engaged in the export of service, you need to fulfil two conditions.
- Money earned should be in form of Foreign Convertible Currency (FCC) like USD, GBP, EUR, etc.
- You must have the Foreign Inward Remittance Certificate (FIRC).
Fulfilment of these two conditions proves you export services and are not liable to pay GST. These two things act as proof that you have exported services.
But, if you receive money through cryptocurrencies and convert them into INR through an Indian crypto exchange, you are not getting money in the form of FCC. Also, you do not get the FIRC.
Laws for accepting cryptocurrencies or digital assets as means of payment for the export of services are not in place. That’s why GST may be applicable.
You may have to explain the whole case to the concerned GST officer that you are getting paid for the export rather than from an Indian crypto exchange for providing any service. As it may appear that you are doing business with the Indian crypto exchange.
Please be cognizant of the fact that if you keep your money in crypto exchanges, it does not mean that the Government cannot track it. They have the full authority to get your details from any Indian or Foreign crypto exchange.
Booking Loss during the Financial Year
Losses have to be disclosed in the Income Tax Return. It benefits you in subsequent years when you book a profit you can set it off against the loss.
It can be used for the next 4 years if you have made a profit(s), provided you had disclosed the loss in its respective financial year.
For Investment in financial assets, you can have Capital Loss which can be both Long Term or Short Term.
For Business Income, you have a Business Loss. You can file that in the return and claim credit for that in the future.
Filing Income Tax Return
There are 3 ITR forms that you can fill depending upon the case.
Only Investment – ITR 2
If you have just invested in crypto. You will be filing ITR 2 form which has the Capital Gains Tax and Salary.
Intra-day Traders, Crypto Miners, or any full-time crypto-related work which classifies as a crypto business will be filing ITR 3 which includes everything from ITR 2 and your Business Income.
Salaried Person with other incomes ITR -1
ITR 1 is for people with income less than 50 lakhs and includes Salary, Pension, or certain Rental Income(s).
You can pay taxes online on the website by yourself. Or, you can always hire a Chartered Accountant to seek assistance.
So, once you have invested in crypto, it is better to file ITR 2 or ITR 3 form.
What If I receive a Salary in Crypto from an Overseas Company?
If you are an employee then it can be the case of non-compliance with the TDS provisions.
Any company with an employee in India needs to have a PAN and also abide by the TDS laws else the entity becomes an assessee in default.
You can either have your employer get registered in India or you can change the nature of your contract from employee to service provider or contractor.
In case you’re already a contractor and receiving crypto for your services, the above example of booking profits and paying taxes on receiving payments in crypto should be followed.
What if I have Not Paid Taxes on the Salary Received in Crypto?
You can file an ITR for the previous assessment year for which the filing period is open. The deadline may be extended, but file it before that to avoid any penalties.
Usually, you are allowed one year from the date of the filing of your income tax return.
Currently, the financial year going on is 2021-2022. So, we can pay taxes for the 2019-2020 financial year too. You may have to check the deadline for the Belated/Revised ITR.
Once the deadline has passed, you may be penalized.
If the tax officer gets the idea that certain income(s) has been evaded or not been taxed properly, he/she will give you an opportunity to file an income tax return during the proceedings.
Tax on NFT Trading
Tax is levied on profit, which is computed by deducting the cost of acquisition of the NFT from the Sale price of the NFT.
Both the prices of acquisition and sale are converted to USD and then to INR. The difference between both is the profit.
The USD cost of the NFT at the time of purchase should be recorded as the value of the cryptocurrency used to make the payment may also change.
Say, you bought an NFT for 2 Ethers, so record the USD value of 2 Ethers at the time of purchase and then convert it to INR.
Later, you sold it for 3 Ethers. So, record the USD value of 3 Ethers at the time of sale and convert it to INR.
The difference of both the computed INR values of Purchase and Sale gives us either the loss or profit on which the tax will be levied.
Taxable Income = Sales Price (in INR) – Cost of Acquisition (in INR)
Income Tax on Crypto-to-Crypto Trading
As discussed, trading is considered a commercial undertaking, so capital gains taxes don’t come into the picture.
The Net Profit or Loss, calculated during the year after cumulating all the Sale and Purchase Transactions, is the amount on which the tax will be levied.
The profit or the loss of each transaction is computed separately.
The profit will be taxed. In case of loss, you can carry it forward to the next financial year.
Moreover, you will be taxed regardless of you converting the crypto to INR as the profit generated qualifies as income no matter what form it is in.
You can use some accounting software such as Coinly, BearTax, etc. to maintain your books.
Income Tax on Staking and Lending Rewards
For traders, all of the income from crypto is clubbed with the net profit or loss at the end of the year. And, tax is paid on the net amount accordingly.
If you are an investor and you earn through staking or lending, you can add it as income from other sources and disclose it for the financial year. Same as above, the tax will be levied on the net amount.
Due to volatility if the staking reward in the current year is significantly less than that of the previous year, you could potentially claim losses too and pay the tax on the new amount.
Keep in mind that staking rewards have to be claimed to get their custody.
You are taxed only in the year you either accrue or receive the rewards.
So, if you have not claimed the rewards even if you are eligible for them, you will not be taxed.
Showing Crypto on the Balance Sheet
Only those individuals whose net income in a year exceeds INR 50 lakhs are required to disclose assets to the Government. It is also optional if you meet certain criteria.
If you cross the INR 50 lakh threshold, you may have to disclose. You can show your crypto assets as intangible assets.
However, if you own any assets in foreign lands, you may have to disclose them regardless of your yearly income. Foreign assets can be any house, or car, or shares of a foreign company you hold.
Also, you have to disclose any directorship(s) you hold in any company in India, irrespective of your income.
Income Tax on Crypto Mining
Crypto mining qualifies as a business. The formula to calculate the income remains the same.
The maintenance costs incurred on a monthly basis can be deducted from the Block Rewards. Only the net amount is taxed.
Taxable income = Profit made from Block Rewards – Cost of Running a node
Can we deduct costs of assets or machinery from the revenue(s) ?
Assets cannot be deducted from the profits in year 1. As a cost, they are allowed to be depreciated or amortized.
Over the period of 5 years, you can write off 20% of the value of the asset each year.
You can depreciate only small gadgets like an Apple Airtag can be claimed as an expense in Year 1.
However, a MacBook worth INR 1 lakh can only be depreciated over 5 years.
Any business expense can be deducted from the profit.
Just like you make income year-round, the Government too wants to earn revenue year-round.
The Government has split the year into 4 quarters: April to June, July to September, October to December, and January to March.
At the end of each quarter, you have to assess how much you have earned, how much is the balance income you expect to make in a year, and the certain slabs according to which you have to file advance tax.
If you are a salaried professional, you don’t need to comply with this because of the TDS provisions.
If you have investments or/and run a business, you are supposed to comply with it.
Failing to pay advanced tax may result in a penalty. It is calculated from the date of filing to the day you file the tax. The penalty is an interest charged at the rate of 1% per month on the amount due.
Amending Tax Returns
In case you have made any mistakes, you are allowed to make rectifications. You may have to check the respective deadline for that.
Is Income Tax payable only when crypto is realized in INR?
The Income Tax Act says all the incomes are taxable whether or not they are in INR. So, it does not matter if you receive or spend crypto. You may have to pay the tax.
Even Crypto-to-Crypto trading is taxable as discussed above.
I do not have my trading history. How to get it?
You can reach out to customer support of the respective crypto exchange. Exchanges are required to keep your transaction details for their record keeping.
Even if an exchange has been hacked or shut operations, you can go through the emails and make a trail of your transactions.
You can create a simple Excel sheet of the transactions.
Based on these transactions, you can file a tax return(s).
Is Commission or referral income taxable under GST?
Commission income is liable to GST regardless of the INR 20 lakh limit GST exemption limit.
You may need to get a GST registration to pay the GST.
However, a minor amount like INR 10000 may not be taxed under GST as it is infeasible for the person. However, you must pay income tax on it.
On the other hand, commissions valuing lakhs or crores of INR may be taxed under applicable GST provisions.
For further information you can visit: Understanding Income Tax on Cryptocurrency Profits in India. Or, you can watch this latest video titled Everything about Income Tax on Crypto in India with Anoush Bhasin.