How are crypto gains taxable in India? How to save tax on crypto gains?

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Happy Holi to all our followers from TEAM TAX DESTINATION. At this festival, we are here to release an article on one more sensational topic.

Introduction:

Since Budget 2022 was presented, tax on crypto gains became the talk of the town. Memes are floating around the social media on the Government's stand like “Your gains are my gains and your losses are your losses.” Team Tax Destination is back with another wonderful article where we are going to discuss how crypto gains/losses are taxed in India, how tax planning can be done against these gains and losses to pay minimum tax.

Income Tax on Crypto Gains & Losses:

Budget 2022 introduced the following provisions for gains & losses on the transfer of Virtual Digital Assets (VDAs) like Cryptos, NFTs etc. For making the concept simple, we use the word crypto instead of VDAs in this article:

• Gain arising from transfer of crypto is taxable at the rate of 30% + applicable surcharge & cess.

• Loss from the transfer of crypto cannot be set off against any income other than gain from the transfer of crypto.

• If you have a loss from crypto more than gains from crypto in a year, then such excess loss cannot be allowed to carry forward to next year.

Let me explain the above rules with examples:

Scenario-1: Say you have earned a salary income of Rs.7 Lakhs per annum, gained Rs.2 Lakhs in Bitcoin and lost Rs.3 Lakhs in Ethereum. Then:

• Gains made in Bitcoin (Rs.2 Lakhs) can be set off with the amount lost in Ethereum (Rs.3 Lakhs).

• Excess loss (Rs.1 Lakh) remaining cannot be set off against salary income, it cannot be carried forward to next year, and is treated as a dead loss.

• You need to pay tax on your entire salary income as per your slab rates.

Scenario-2: Say you have earned a salary income of Rs.7 Lakhs per annum, gained Rs.3 Lakhs in Bitcoin and lost Rs.2 Lakhs in Ethereum. Then:

• Gains made in Bitcoin (Rs.3 Lakhs) can be set off with the amount lost in Ethereum (Rs.2 Lakhs).

• Income tax on the excess gain (Rs.1 Lakh) is payable at the rate of 30%+Surcharge+Cess. Net tax rate will be 31.2% in this case (30% Tax + 4% Cess). So you will be required to pay Rs.31,200 as tax on gains you have made in crypto.

• You need to pay tax on salary income as per your slab rates.

TDS on Crypto Transactions:

From 01st April 2022, any person purchasing crypto from a resident has to deduct tax at the rate of 1% of the purchased amount and remit the same to the Government in the seller's name. I know you are having so many questions like why are we discussing the tax on crypto again? Why is it 1% and not 30%? Why should I pay in the seller's name? Etc. Let me make it clear for you.

If you are a salaried employee, you might have already heard about the term TDS where your employer company deducts tax from your salary and pays the same to the Government in your name. Similarly while purchasing crypto, the buyer needs to deduct 1% from the amount to be paid to the seller and pay the same to the Government in the name of the seller.

For example, say Mr Ram purchased bitcoin worth Rs.70,000 from Mr Rahim through a crypto exchange. Normally Ram will be paying Rs.70,000 to Rahim and receiving the bitcoin through the exchange. Now because of this provision, he is required to deduct Rs.700 (1% of Rs.70,000) and pay Rs.69,300 to Rahim and receive bitcoin worth Rs.70,000 from Rahim. Ram is required to pay the tax that he deducted (Rs.700 in this case) to the Government and file a TDS return stating the PAN number of Rahim and the amount paid and tax deducted.

Now, you might have a question like how will Mr Ram knows the Name & PAN number of the seller right. This provision was included to increase transparency in crypto transactions where crypto exchanges will have to maintain details of the seller and share the same with buyers for a tax deduction.

To reduce compliance on small transactions, persons falling under column 2 of the below table are not required to deduct tax if total crypto purchases made in a Financial Year (April to March) does not exceed the annual limit specified in column 3.

Scenario	Person	AnnualLimit
1	Has no income from business or profession in the year preceding purchase of crypto	10,000
2	Having a Business with revenue of upto Rs.1 Crore in the year preceding purchase of crypto	50,000
	Having a Profession with revenue of upto Rs.50 Lakhs in the year preceding purchase of crypto
3	Having a Business with revenue of > Rs.1 Crore in the year preceding purchase of crypto	0
	Having a Profession with revenue of > Rs.50 Lakhs in the year preceding purchase of crypto

The main aim of this provision is to bring transparency and reduce volumes in crypto transactions. Let me explain this with an example. Assume you are an active crypto trader and trade 2 times a week. Without taking your gains/losses into consideration, by the end of 3 months, 20% of your capital will be blocked and would have been remitted as TDS in your name.

Tax on Gifting Crypto:

After seeing the above provisions for a tax deduction on purchase & tax on the sale of crypto, you might have thought of the below idea:

Modifying the above crypto purchase example, say Ram & Rahim are friends. Ram wants to purchase crypto & Rahim wants to sell crypto. Now if they do the transaction via a crypto exchange, Ram needs to follow the above mentioned cumbersome process & Rahim needs to pay 30% tax. So, they got a brilliant idea where Rahim will transfer crypto worth Rs.70,000 to Ram as a gift and will receive the consideration in cash (as black money). Since no consideration is received via an exchange, TDS is not required to be deducted and Ram will be free from the above process. Rahim is not required to pay any tax since he did not receive any consideration for the transaction via exchange.

The above idea looks fantastic right? The government also thought the same. To curb the above transactions, crypto is included in the term property in Section 56(2) of the Income Tax Act. Its impact is as follows:

• If gifts received in the form of any property (other than immovable property) in a Financial Year exceeds Rs.50,000, then the entire gifts received are taxable under Income Tax Act. This implies if total gifts received as property in a year does not exceed Rs.50,000, then such gifts are exempt from payment of Income Tax.

• Gifts received from your relatives in any form of property are exempt from Income Tax. 

To continue with the above example, if Rahim gifts crypto to Ram, then Ram will have to pay tax on the entire Rs.70,000. Had Rahim sold crypto to Ram normally, then he would have paid tax only on the gains he made. Suppose Rahim bought crypto for Rs.50,000 and sold it to Ram for Rs.70,000, then he will be required to pay tax only on gains he made of Rs.20,000. If he gifts it to Ram, then Ram should pay tax on the entire Rs.70,000.

Tax on gains/losses made in this year:

Since the above-mentioned amendments are applicable from 01st April 2022, one may think that crypto gains are not taxable for this year. Let me make it clear for you. Every income is taxable under the Income Tax Act unless otherwise it is exempted (like agriculture income etc.). Hence income from crypto is taxable this year as well. Let’s discuss this in detail.

The analysis made in this segment is the views of the author based on the available information. Please read the disclaimer at the end of this article before filing your returns based on this view: 

• In case you have made huge unrealized gains in crypto as of date, then you can realize the same by exiting your positions and entering again so that your gains will not be subjected to the above provisions.

• In the absence of clarification on the taxability of gains for this year, gains from crypto can be shown under Income From Other Sources as crypto cannot be included under the Capital Asset definition under the Income Tax Act.

• If you have made a loss in crypto this year, then that loss can be used to set off with any other income. If you have a loss even after the setoff, then it cannot be carried forward to next year.

How to save tax on gains in crypto:

Coming to the main part of the story as to how to save tax on gains in crypto, the following things can be noted:

Tax Harvesting:

• In simple words, in case you are having realized crypto gains in a year and unrealized crypto losses that you do not wish to redeem in near future, you can realize your loss by selling the crypto and buying it again so that the loss you booked by selling can be used to setoff the existing crypto gains.

• This way, you are escaping 30% tax on your crypto gains this year.

Tax Loss Harvesting:

• Coming to the other way around, in case you are having realized crypto losses in a year and unrealized crypto gains that you do not wish to redeem in the near time, you can realize your gains by selling the crypto and buying it again so that the gains you have made can be used to set off with existing crypto losses.

• This way, you are using your dead loss to reduce your gains that would have been taxable at 30%.

Others:

• In case you would like to purchase more crypto and avoid TDS deduction and return filing procedure, then you can do the same in your family member’s account with their consent. Since the annual limit mentioned above is per person, a fresh limit will be available for every family member.

Frequently Asked Questions:

Q1: Is there any breakup for long-term and short-term gains in crypto?

A1: No.

Q2: If I swap my one crypto with another, will I be required to pay tax & follow the above procedures?

A2: Yes. The term ‘Transfer’ under the Income Tax includes the sale, exchange, extinguishment of rights on an asset.

Q3: If I gift crypto to my friend/relative, will I be required to pay any tax?

A3: No tax is payable by the person giving the gift.

Q4: Since some crypto platforms are allowing their users to make Fixed Deposits of their crypto holdings, how much tax is payable on interest income earned on crypto?

A4: Since Budget 2022 emphasized tax only on gains/losses on transfer, 30% tax is not applicable on the interest income earned on crypto. It will be added as Income From Other Sources and will be taxed as per your slab.

Disclaimer:

This article is for educational purposes only and does not promote/suggest taking positions in any Virtual Digital Assets. Please consult your tax consultant before filing your tax returns based on the above information. Contents of this article may be taken as a reference while approaching your tax consultant but cannot be entirely relied upon. This article is being written based on the amendments made in Budget 2022 and any later updates might not be captured in this article.

Content Writer

CA Pavan Kalyan