Cryptocurrency tax: Your definitive guide to new rules

India has not banned crypto investing. It has been brought it under the tax net. Image: Shutterstock

Every digital asset transfer will be taxed at 30 percent, meaning your cryptocurrency investments or NFTs (non-fungible tokens) will be taxed. India's Finance Minister also stated that blockchain will be utilised to create a national digital currency. Many people believe that as a result of these developments, the government has de-facto declared crypto investments as legal, and that India's digital currency will be the same as your other cryptocurrencies.

Is this right? No. Please follow along as I clear the air on some of India's most recent crypto discussions.

What is the difference between India's digital currency and cryptocurrencies?

To begin, you must understand the fundamental difference between a digital currency and a cryptocurrency. The digital currency has features comparable to actual currency, with the exception that it does not exist in physical form. It can be used to buy products and services. Your cryptocurrencies or crypto assets are not legal tender. It means that they cannot be used to buy or sell items. It's similar to buying gold or other investment products, where the price is determined by a variety of factors.

The government has emphasised numerous times that no other kind of private digital currency will ever be considered legal in India. Since cryptocurrency is not a legal tender in India, it cannot be used in a mall for your next laptop or smartphone purchase.

What's all the talk about cryptocurrency becoming legal in India? 

Investing in crypto was never forbidden or banned. It may be done just like investing in stocks or gold. Our government is already working on a crypto bill, and only time will tell whether it will be regulated or downright banned. You can invest in it till then and pay tax on the profits.

Can I invest in cryptocurrency?

Yes, India has not banned crypto investing. It has been brought it under the tax net. Do your due diligence and stick to your risk profile before investing in cryptocurrency, as I have advised in many of my previous columns. Invest in cryptocurrency at a maximum of five percent or with money you can afford to lose because it has the highest risk-reward ratio. Invest cautiously until you understand this new animal. Also, now be prepared to pay a tax of 30 percent on your crypto gains.

Could you elaborate on the taxes of cryptocurrency?

You must now pay a 30 percent tax on the proceeds of virtual or digital assets, such as your crypto investments. Previously, there was no clarification on whether cryptocurrency earnings should be considered as capital gains, business, speculative or income from other sources when it came to paying tax on them. As a result, many people either paid less tax or didn't pay it at all.

Do I have to pay taxes backwards for all of the past years?

If there is an income, there will be a tax. Unless it is exempted. Therefore yes, you were and are responsible for all of your gains in those financial years.

How do I calculate my taxes?

You should bear in mind that aside from the acquisition cost, you will be unable to claim any deductions or exemptions. The only deduction will be for the cost of acquisition. Thus if you sell your Bitcoin for Rs 3 lakh after purchasing it for Rs 1 lakh, you would have to pay 30 percent tax on the gains, which will be on Rs 2 lakh, with no other deductions.

Furthermore, the finance minister has stated that any losses sustained in the transfer of digital assets cannot be offset against other income and that the transfer will be subject to a 1 percent TDS.

What does this 1 percent TDS regulation mean when I'll be paying 30 percent tax on my crypto gains? 

Many other TDS rules, such as 1 percent TDS on property purchases or how your employer deducts TDS from your pay, are similar to the 1 percent rule. This is not your income tax liability but rather a tax withholding to keep the transaction under the radar of the Income Tax Department.

Does 'transfer of digital assets' equal 'sale'?

Cryptocurrencies—unlike real estate, mutual funds, and equities—can be simply transferred. People frequently exchange cryptocurrency through their wallets or give it as a gift to family members. A transfer is a broad term, and many people are concerned about transferring cryptocurrency between their own wallets. As it is akin to transferring money from one bank account to another, ideally this should not result in a sale for taxation purposes. However, a transfer to a third party is unquestionably a sale. Therefore, we'll have to wait till the bill is passed for more clarification.

What happens if I give away my cryptocurrency as a gift?

In the hands of the recipient, gifts of digital assets are now taxable. A gift from a relative is tax-free under income tax laws, but we must wait for greater clarity on whether the same rule will apply to crypto gifts.

 The writer is a chartered accountant and mentor to NRP Capitals. 

The thoughts and opinions shared here are of the author.