How CryptoCurrencies Taxed in India?

Background

A cryptocurrency (aka crypto) is a digital or virtual currency designed casually and later became popular, used as a currency in certain parts of the world, to buy things like a typical physical currency (Indian Rupee).

Bitcoin, Ethereum, XRP are some of the cryptocurrencies are being traded in various crypto exchanges around the world and gained much popularity in recent times.

RBI Ban & Court Rulings

In India, RBI banned the cryptos to prohibit investments and / or trading cryptocurrencies, virtual currencies in India and later Supreme Court of India set aside the ban through a special ruling.

Let's look at the chronology of major cryptocurrency regulatory events in India

Dec 24th, 2013: RBI 1st Note

Initially, it was a guidance document released to caution the people of India, regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such virtual currencies.

Dec 05th 2017: RBI 2nd Note

RBI again re-iterated its position stating the same with serious cautionary note advising not to trade, own virtual currencies in India.

Mar 04th 2020: Court Ruling

Supreme Court of India set aside the RBI ban in using or dealing with cryptocurrencies in India. With the Supreme court ruling, the banks are allowed to handle cryptocurrency transactions but not recognised as a currency. Later that led to additional investments and innovation with the trading platforms in India.

Aug 03rd 2021: Ministry of Finance, India

Shri Pankaj Chaudhary, Honble Ministry of State, Ministry of Finance, given a written statement on the floor of Lok Sabha, "that all private currencies, except any cryptocurrency issued by the State, be prohibited in India".

Feb 01st 2022: Budget Session 2022

Honorable FM Smt Nirmala Sitharaman announced that

1. New Digital Currency (Digital Rupee) to be issued by the RBI starting from 2022-23
2. Virtual Digital Assets to be taxed @ 30% .. no deduction shall be allowed .. except cost of acquisition. Loss cannot be set off against any other income in India.
3. TDS on Virtual Digital Assets must be paid @ 1% for all transfers. Gifts from Virtual Assets will be taxed in the hands of the receiver.

Taxability until Mar 31st 2022

As per the Income Tax Act, a Capital Asset means a property held be a person. From that perspective, As cryptos (synonymously called 'Bitcoin' though it's just one type of crypto) are not recognised as a currency, could be deemed to be a capital asset.

As the people buying, holding the cryptos are in essence, are in possession of a capital asset. Selling such leads to a gain or loss and can be treated as capital gain or capital loss.

Like intra-day trading of stocks, futures, or options, frequent trading of cryptos shall be taxable as a business income.

Both long-term capital gains (LTCG) or short-term capital gains (STCG) for the crypto trading attract prevailing tax rates. Refer Capital Gains Guide

Crypto losses should be treated similar to any other capital losses and the carry forward rules do apply for such.

Applicable residency rules (NRI, ROR, RNOR) for capital assets tax treatment do apply for cryptos too.

Taxability from Apr 01st 2022

Any Virtual Digital Asset (including Cryptocurrency) is generally considered as a capital asset until 2022 in India. During Budget 2022, it was announced that the cryptocurrency is considered as a 'special asset' where the tax rate applicable would be 30%without indexation, without expenses, without set-off against any income within the year, and without carryforward losses to future years.

Crypto Tax Calculator

Refer Crypto Tax Calculator? for a comprehensive tax calculation on crypto trading such as Bitcoin, Ethereum, XRP. Calculate income tax, surcharge, education cess based on the new tax rules applicable in India. Considers Trading such as Bitcoin, Ethereum, XRP comprehensive aspects such as Residential Status, Jurisdiction of Crypto Exchange, Income Slab, Gifting, Lost Stolen cryptos

Caution

While the underlying blockchain technology has a variety of use cases in India, unless cryptos are recognised as a currency by the RBI, trading on such is like trading an asset where the asset's core purpose and scope was not fully usable.

With the current state of economy due to COVID-19 pandemic and subsequent challenges in the banking sector, RBI may formally ban trading of cryptos in coming months and may introduce a policy document to introduce it's own 'BCoin'.

In addition, looking around the world, like in USA, IRS treating the gains from the bitcoin / cryptos as 'unqualified income', while it is not illegal, but if one's portfolio generates more than 10% of the gross profit, the IRS only allows to enjoy ONLY 10% and the rest of expected to be confiscated.

Treatment around the World?

1. No major country in the world except Japan and Australia, has laws in accepting the crypto currency as "currency".
2. Most of the nations are identified as neutral to the idea of it's existence in their economies and being traded as an "asset".
3. Major countries like China and Russia have banned the use / trade / exchange of cryptos either as an "asset" or "currency".

* Above observations came from various sources as on Mar 23rd 2022.