Cryptocurrency Taxation Rules in India

Learn everything about Cryptocurrency Taxation in India, including 30% tax under Section 115BBH, 1% TDS under Section 194S, and tax rules for crypto payments, mining, staking, and airdrops. Understand how to report Virtual Digital Assets (VDA) in Income Tax Returns (ITR) and stay compliant with Indian crypto tax laws

Cryptocurrency has gained significant popularity in India, leading the government to introduce strict tax regulations to ensure compliance. The Finance Act, 2022 classified cryptocurrency as a Virtual Digital Asset (VDA) and introduced specific tax provisions under the Income Tax Act, 1961. Understanding these tax rules is essential for investors, traders, and businesses dealing with crypto.

What is a Virtual Digital Asset (VDA)?

The Finance Act, 2022 introduced Section 2(47A) of the Income Tax Act, 1961, defining Virtual Digital Assets (VDA). A VDA includes:

• Cryptocurrencies such as Bitcoin, Ethereum, and other digital tokens.
• Non-Fungible Tokens (NFTs) or any similar digital assets.
• Any other digital asset notified by the government in the future.
• This classification ensures that all transactions involving cryptocurrencies and other digital assets are regulated under Indian tax laws.

Tax on Cryptocurrency Profits (Section 115BBH)

Under Section 115BBH, any income arising from the transfer of a Virtual Digital Asset (VDA) is subject to a flat 30% tax. Key provisions include:

• No deductions allowed except for the cost of acquiring the asset.
• Losses from crypto transactions cannot be set off against other income or carried forward to the next financial year.

For example, if an investor buys Bitcoin for ₹1,00,000 and sells it for ₹1,50,000, the profit of ₹50,000 will be taxed at 30%, resulting in a tax liability of ₹15,000 (excluding surcharge and cess).

TDS on Crypto Transactions (Section 194S)

To track crypto transactions and ensure tax compliance, the government introduced Section 194S, which mandates a 1% Tax Deducted at Source (TDS) on all crypto transactions exceeding ₹50,000 (₹10,000 for specified individuals) in a financial year.

• The buyer must deduct 1% TDS before making the payment to the seller.
• The deducted TDS must be deposited with the government and reported in the buyer’s tax return.
• If TDS is not deducted, the buyer may face penalties and interest charges.

For instance, if a trader sells Bitcoin worth ₹1,00,000, the buyer must deduct ₹1,000 as TDS and deposit it with the government. The seller will receive ₹99,000, and the deducted amount will be adjusted against their total tax liability.

Income Tax on Receiving Payment for Services in Cryptocurrency

Now a days in many cases the people are getting hired where the payment towards employment or services are made in Cryptocurrency. Such payments for services are taxed at two levels:

Tax on Receipt of Crypto as Income

When an individual or business receives cryptocurrency as payment for services, it is treated as income from salary (for employees) or income from business or profession (for freelancers and businesses). The tax is calculated based on the fair market value of the crypto in INR on the date of receipt. This income is taxed according to the applicable income tax slab rate.

For example, if a freelancer receives 0.01 Bitcoin for a project when Bitcoin is valued at ₹40,00,000 per BTC, their taxable income will be ₹40,000 (0.01 × ₹40,00,000). This amount is taxed according to the applicable income tax slab rate.

Tax on Conversion of such Crypto to INR (Capital Gains Tax)

If the recipient holds the crypto instead of immediately converting it into INR, any future price increase is considered a capital gain. When the crypto is eventually sold or exchanged for rupees, the difference between the original fair market value (when received) and the sale price is taxed at 30% under Section 115BBH, plus surcharge and cess.

For example, if the freelancer later sells the 0.01 Bitcoin when its value has increased to ₹50,00,000 per BTC, the total sale value would be ₹50,000 (0.01 × ₹50,00,000). The capital gain here is ₹10,000 (₹50,000 – ₹40,000), which will be taxed at 30% plus applicable surcharges and cess.

Taxation of Crypto Mining, Airdrops, and Staking

Crypto earned through mining, staking, or airdrops is considered taxable income under Section 56(2)(x) and is taxed at the applicable income tax slab rate. The key points include:

• Mining Rewards: The fair market value of the mined crypto is taxable as income on the date of receipt. No deductions are allowed for electricity or hardware costs.

• Airdrops: Free tokens received from airdrops are taxed as income at their fair market value at the time of receipt. If these tokens are later sold at a profit, capital gains tax applies.

• Staking Rewards: Earnings from staking are also taxed as income upon receipt. If these rewards are held and sold later, capital gains tax applies.

Reporting Crypto in Income Tax Returns (ITR)

All crypto-related income must be reported while filing Income Tax Returns (ITR) under the appropriate income category:

• Salary income for employees receiving crypto as part of their salary.
• Business income for freelancers and businesses receiving crypto as payment.
• Capital gains for investors trading crypto assets.

Failure to report crypto earnings can lead to tax audits, penalties, and interest on unpaid taxes.

Key Takeaways from This Article

• Cryptocurrency is classified as a Virtual Digital Asset (VDA) under Section 2(47A) of the Income Tax Act.

• Profits from crypto transactions are taxed at a flat 30% rate under Section 115BBH, with no loss set-off allowed.

• 1% TDS applies to crypto transactions above ₹50,000 (₹10,000 for specific individuals) under Section 194S.

• Crypto payments for services are taxed as salary income or business income, depending on the recipient.

• Mining, airdrops, and staking rewards are taxable upon receipt as per Section 56(2)(x).

• All crypto income must be reported in Income Tax Returns (ITR) to avoid penalties.

Frequently Asked Questions (FAQs)

1. What is a Virtual Digital Asset (VDA) under Indian tax laws?

A Virtual Digital Asset (VDA) is defined under Section 2(47A) of the Income Tax Act, 1961. It includes cryptocurrencies like Bitcoin, Ethereum, Non-Fungible Tokens (NFTs), and any other digital asset notified by the government.

2. How are profits from cryptocurrency trading taxed in India?

Under Section 115BBH, any income from the transfer of a Virtual Digital Asset (VDA) is taxed at a flat 30% rate. No deductions are allowed except for the cost of acquisition, and losses cannot be set off against other income or carried forward.

3. What is the 1% TDS rule on cryptocurrency transactions?

As per Section 194S, a 1% TDS is deducted on crypto transactions exceeding ₹50,000 (₹10,000 for specified individuals) in a financial year. The buyer must deduct this TDS before making payment to the seller and deposit it with the government.

4. How is receiving salary or freelancing income in cryptocurrency taxed?

Crypto payments for services are taxed in two stages:

1. At the time of receipt – The fair market value of the crypto on the date of payment is taxed as salary income (for employees) or business income (for freelancers and businesses).
2. At the time of conversion to INR – If the crypto is later sold at a higher price, the gain is taxed at 30% under Section 115BBH as capital gains.

5. Are mining rewards, airdrops, and staking rewards taxable?

Yes, earnings from mining, airdrops, and staking are considered taxable income under Section 56(2)(x).

• Mining rewards – Taxed as income based on their fair market value at the time of receipt.
• Airdrops – Free tokens received are taxed as income at their market value. If sold later at a higher price, capital gains tax applies.
• Staking rewards – Taxed as income upon receipt. If held and later sold at a profit, it is subject to capital gains tax.

6. How should cryptocurrency income be reported in Income Tax Returns (ITR)?

Crypto-related income must be reported under the appropriate head:

• Salary income – If received as part of employment compensation.
• Business income – If received as payment for services or freelancing work.
• Capital gains – If crypto is traded for profit.

Failure to report crypto income can lead to tax audits, penalties, and interest on unpaid taxes.

7. Can losses from crypto trading be set off against other income?

No, under Section 115BBH, losses from crypto transactions cannot be set off against other income (like salary or business income) or carried forward to the next financial year.

8. What happens if I don’t deduct TDS on crypto transactions?

If TDS is not deducted under Section 194S, the buyer may face penalties and interest charges from the tax authorities. Additionally, the seller may also face compliance issues for unreported income.