Understanding taxation as a crypto investor in India
As the tax season draws near, the taxation obligations for Virtual Digital Assets (VDAs) are a key topic among India’s crypto investors. As they prepare to file their taxes on gains and claim refunds where applicable, compliance remains crucial and non-negotiable. 2024 was another big year for crypto adoption in India, and this tax season is crucial in building trust and transparency. It also gives regulators a clearer picture of the growing crypto market in the country.
Given the existing tax structure—a 30% flat tax on gains with no offset of losses and a 1% Tax Deducted at Source (TDS) on crypto transactions—investors and traders must navigate their tax obligations carefully. While consulting a skilled tax expert is highly recommended, there are a few essential factors to keep in mind.
The VDA tax framework – What You Need to know
India’s crypto tax framework, despite being stiff and onerous, is intended to promote transparency and compliance, making it important for investors to keep proper records of their gains. Under Section 115BBH of the Income Tax Act, all profits from crypto assets—including NFTs and staking rewards—are taxed at a flat 30%. Unlike traditional investments, crypto losses cannot be adjusted against future gains, though some recent changes have allowed limited exceptions.
Crypto gifts are also taxable if they exceed a certain limit. Since NFT transactions and staking rewards are included under taxable income, investors should carefully track all their digital asset activities.
With the tax authorities increasing their oversight on VDA transactions, keeping accurate records of transactions is more important than ever. A well-maintained trade history will make tax filing smoother and help investors stay compliant while avoiding potential legal issues.
1% TDS: What It Means and How to Stay Compliant
In the Union Budget 2022, the government introduced a 1% TDS (Tax Deducted at Source) on all crypto sell transactions. This rule is a key part of India’s crypto tax system, and one that has severely impacted the VDA sector. The purpose of this TDS is to help the government track crypto transactions while minimising the burden on small traders. The updated threshold is ₹50,000 for retail investors and ₹10,000 for others, ensuring a balance between tax compliance and ease of trading.
For transactions made through Indian crypto exchanges/platforms, TDS is automatically deducted and deposited with the tax authorities. However, for peer-to-peer (P2P) trades as well as for transactions/trades on foreign platforms, the seller is responsible for deducting and depositing the TDS. Investors must ensure they follow these rules, since failure to deposit TDS on eligible transactions can lead to penalties, interest charges, and legal issues.
Claiming Refunds & Filing Taxes
Investors can track their TDS deposits using Form 26AS or refer to the tax certificates issued by their respective crypto exchanges. The TDS withheld from crypto transactions can be deducted from the total tax bill as an advance tax payment rather than an additional tax when filing income tax returns.
As of January 2024, the Ministry of Finance reported that around ₹180 crore had been collected in TDS from VDA transactions. While this shows better compliance in the industry, it also highlights the challenges faced by individual investors. If someone has paid more TDS than their actual tax liability, they may be eligible for a refund when filing tax returns. Keeping a clear record of all transactions and deductions is crucial to ensure a smooth refund process.
Investors must take a proactive approach to ensure compliance rather than waiting for tax filing deadlines. Keeping a detailed record of all trades and transactions will be crucial for accurate tax calculations. Reviewing deductions and claiming refunds where applicable can help investors optimise their tax liabilities. For those dealing with complex transactions, seeking professional tax advice can provide much-needed clarity.
Views are personal. Author is SVP & Head – Public Policy, CoinSwitch