Crypto currencies, also known as virtual digital assets (or VDAs), have emerged as popular digital assets for online transactions. Crypto traders try to maximize their gains by investing in the rising values of cryptocurrencies. However, substantial profits in the world of VDAs also come with inherent risk. They are volatile and carry the potential for significant capital losses.
Crypto currencies operate as digital currencies and can be used as a means of payment when you purchase goods and services. The decentralized nature of crypto currencies, as they function without intermediaries like banks or central authorities, has caused much debate & controversy since they were created.
Taxation of Cryptocurrencies in India
Income generated from the transfer of virtual digital assets, or VDAs, is subjected to a flat tax rate of 30%. This tax applies to cryptocurrencies, tokens, or codes obtained through cryptographic methods. No deductions, except for the acquisition costs, are permitted. This means you can’t reduce your taxable income by claiming expenses or allowances. Furthermore, any losses incurred from VDA transfers cannot be offset against other income or carried forward to future years. If you receive VDAs as a gift, you are personally responsible for fulfilling the tax obligations.
Under the Finance Bill of 2022, a new provision called section 194S has been introduced. It mandates a 1% tax deducted at source (or TDS) on payments associated with VDA transfers. However, with VDA transferred in crypto exchanges, the responsibility of deducting taxes lies with the exchange itself as buyers usually lack information about the sellers. This proposes a challenge, particularly in swap transactions involving different types of VDAs.
5 Common Mistakes to Avoid When Filing Crypto Tax in India
Failure to Report Crypto Transactions
One of the most widespread issues with crypto is that many people do not disclose their trading transactions. When filing taxes in India, all crypto trading platforms provide transaction details, which can be downloaded from their websites. In the event of failure to report crypto income on your income tax return, the income tax department, or ITD, may initiate action by issuing a notice. Under section 148/148A of the Income Tax Act, this is referred to as a notice for income escaping assessment. This notice is issued when an income tax officer has grounds to believe that the taxpayer has not accurately disclosed their income, so they have not fulfilled their complete tax obligations. This process involves two steps prior to issuing a notice. Under section 148, the auditor will first reach out to the taxpayer with a 148A notice. This initial communication grants the taxpayer an opportunity to provide explanation or argument as to why a 148 notice should not be issued. If the auditor suspects that you have not reported crypto income, or any other income, they have up to three years from the conclusion of the relevant assessment year to issue at 148 notice. However, if the amount escaping assessment exceeds Rs50 lakhs, the auditor has up to 10 years from the end of the relevant assessment year to issue such a notice. Once a notice is issued, the ITO will proceed to assess your income, under section 147 of the Income Tax Act.
Ignoring Tax Consequences of Crypto Trading
When engaging in cryptocurrency trading, you’re essentially buying and selling assets or coins. Any profits acquired from such trading activities are subject to taxation in India. The Indian government imposes taxes on all income, regardless of its origin. This means that even if you were not a resident, you’re still obligated to pay taxes on any profits obtained from trading crypto currencies in India. Neglecting to acknowledge the tax implications can lead to penalties and interest. The consequences of tax evasion can be severe, including the possibility of imprisonment. Many individuals mistakenly believe that trading between different cryptocurrencies without withdrawals to banks is exempt from taxation. However, in India, crypto trades are considered taxable events. Therefore, it’s essential to calculate the gains or losses from each trade and report them accordingly.
Non-disclosure of Foreign Crypto Assets
If you’re holding cryptocurrencies in offshore exchanges or foreign wallets, it’s imperative to disclose these holdings in your tax return. The income tax department has been diligently pursuing tax evaders and emphasizing tax compliance. Neglecting to report foreign crypto assets can result in penalties and legal ramifications. It’s crucial to fulfill your reporting obligations to ensure compliance with tax regulations and avoid any adverse consequences.
Improper Valuation of Crypto
Ensuring proper valuation of your cryptocurrency investments holds significant importance for tax purposes. In India, it’s essential to value your crypto currencies in Indian rupees, using fair market value as of the transaction date. Relying on unreliable or outdated exchange rates may result in incorrect tax calculations. The government of India (GOI) does not allow the offsetting of losses and taxes are to be paid based on the gross profit earned. Therefore, maintaining accurate and up-to-date valuation of your cryptocurrency holdings is crucial to ensure proper tax compliance.
Avoiding Seeking Advice from a Tax Pro
The tax landscape surrounding cryptocurrencies can be tricky, with regulations that are prone to modification. It is highly recommended to seek the assistance of a qualified tax professional or chartered accountant who is well-versed in cryptocurrency taxation. Such experts possess the knowledge and expertise necessary to offer tailored guidance based on your unique circumstances, ensuring adherence to the most up to the date regulations. When you consult a tax professional, you can navigate the complexities of cryptocurrency taxation and maintain compliance with the prevailing rules and regulations.
Complete Disclosure of Cryptocurrencies in Schedule VDAs
When it comes to VDAs, it’s crucial to provide comprehensive disclosure by filling out the designated section called “schedule VDAs” when filing your tax returns. This entails providing detailed information regarding the VDAs you possess or have received. Additionally, VDAs obtained through mining or airdrops will be subject to taxation based on individual slab rates. This means the tax liability will be determined according to the income tax slabs applicable to your overall income. Accurately reporting and disclosing your VDAs, as well as any income generated from mining or airdrops, is vital to ensure tax compliance and avoid potential penalties or legal complication. If you hold such receipts of VDAs as investments in the future, they are considered capital assets and subject to a 30% tax on subsequent sales.
TDS Compliance
Tax deducted at source (or TDS) is deducted from crypto transactions to ensure tax compliance for traders and investors. TDS applies to both sellers and buyers in crypto-to-crypto transactions. As per Section 194S, a TDS rate of 1% is applicable to the transfer of any virtual digital assets, be it cryptocurrency or NFTs. If you trade on an Indian exchange, the TDS will be deducted by the exchange and deposited with the government. However, if the buyer engages in P2P transactions or trades on foreign exchanges,it is the buyer’s responsibility to deduct TDS and remit it to the government on or before the seventh of the subsequent month.
In conclusion, there’s a lot of money to be made and lost in the world of cryptocurrency trading. Navigating the precise tax laws concerning crypto exchanges can be tricky. Rest assured if you do not file taxes on your crypto transactions in a prompt and precise manner, the crypto may just hit the fan!
