All You Need To Know About Cryptocurrency Taxation in India

In India, the topic of cryptocurrencies is now widely discussed and acknowledged as an authorized investment option that is liable to taxation. Investors with a high risk appetite tend to favor cryptocurrencies as a form of investment.

Cryptocurrencies provide many benefits, including democratized ownership, security, and privacy. They are the building blocks of decentralized financial systems. Additionally, they use blockchain technology to power their networks, which are global and intermediary-free.

Are Cryptocurrencies Considered ‘Assets’? 

Section 2(47A) of the Income Tax Act has been added to define the term "Virtual Digital Assets," which includes cryptocurrency and NFT. The definition is broad and encompasses any data, code, number, or symbol that is generated through cryptography and is not associated with Indian or foreign currency. 

Simply put, gift cards and passes are not included in the Virtual Digital Assets; instead, they refer to all forms of cryptocurrency assets, including NFTs, tokens, and cryptocurrencies.

How Does Cryptocurrency Taxation Work in India? 

In India, there is a flat tax of 30% on income derived from the sale or purchase of cryptocurrency assets. Regardless of whether you earned cryptocurrency through staking rewards or airdrops, or whether you sold or exchanged your cryptocurrency for another cryptocurrency, you will need to pay this tax.

Long-term cryptocurrency ownership has no tax benefits, in contrast to other asset classes. Regardless of how long you hold cryptocurrency, you must pay the 30% tax on income. Additionally, if you purchase or sell cryptocurrency above a specific threshold, you will be subject to a 1% TDS tax. 

The 30% tax on cryptocurrencies was implemented starting from April 1, 2022. India's Minister of Finance stated in his 2022–2023 Budget Speech that the "magnitude and frequency” of cryptocurrency transactions makes it crucial to implement taxation.  

However, It is important to remember that not all asset classes are liable to the same flat 30% tax, including stocks and real estate.

Is it Possible to Avoid Taxation on Cryptocurrencies? 

It is important to remember that it is highly risky and illegal to attempt to avoid paying your cryptocurrency taxes. Well-known platforms such as WazirX are obligated to gather consumer data and submit it to the IRS upon request.

Over the past few years, the Indian government has been closely monitoring the cryptocurrency landscape. In 2022, from 11 cryptocurrency exchanges that were suspected of evading taxes, the IRS confiscated more than 95 crore INR.

The 30% tax cannot be legally avoided, but you can reduce your tax liability and profit from the coins' continued appreciation by using strategies like purchasing and holding cryptocurrency for an extended period of time.

In India, the severity of the offense and the degree of tax evasion determine the penalties for avoiding cryptocurrency taxes. Here is a quick summary of the fines:

* Underreporting or misreporting income carries a fine that can go up to 200% of the tax that was avoided. In addition, those found guilty of such crimes could spend up to seven years in imprisonment. 

* There are a number of penalties for filing an income tax return after the deadline. These include late fees of between Rs. 1,000 and Rs. 5,000 as well as a monthly interest charge of 1% on the outstanding tax amount. Similar to underreporting/misreporting income, a 7-year prison sentence could be imposed. 

* There are consequences for not deducting TDS from payments or for not depositing the TDS with the government. In such circumstances, non-compliance may result in interest charges and late fees for individuals.

* There is a Rs. 200 per day late fee for people who do not file a TDS return within the allotted time.

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