Navigating Crypto Tax Landscape: A Beginner’s Guide For Successful Tax Filing In India

Cryptocurrencies have become increasingly popular as an alternative to traditional investments, garnering attention worldwide. However, the regulations surrounding cryptocurrencies are complex and vary between countries, creating challenges for tax authorities and taxpayers alike.

In India, cryptocurrencies have been recognised as virtual digital assets (VDAs) and are subject to a taxation framework. According to a report, India ranked second globally in crypto adoption in 2022, boasting over 10 million crypto users and $6.6 billion in crypto transactions. The data highlights the importance for crypto investors and traders to comprehend the tax implications of their crypto activities and adhere to Indian tax laws.

Based on an interview with Punit Agarwal, Founder KoinX, an automated crypto taxation platform that lets cryptocurrency investors automate their crypto taxation, in this article crypto taxpayers can explore the crypto tax landscape in India, offering insights and guidance for successful tax filing.

Crypto-taxation In India

According to Punit Agarwal, in the 2022 Budget, the Indian government provided clarification on its official stance regarding cryptocurrencies and virtual digital assets (VDAs). Section 2 (47A) of the Income Tax Act defines VDAs. It is a broad definition which encompasses various crypto assets, including cryptocurrencies, NFTs, tokens, and more.

Profits derived from trading cryptocurrencies are subject to a 30% tax rate (plus surcharge & 4% cess) as per Section 115BBH. This rate aligns with India's highest income tax bracket, excluding surcharge and cess. It applies to investors, traders, and any individual involved in the transfer of crypto assets within a given financial year.

Regardless of whether the income is classified as investment income or business income, the 30% tax rate applies uniformly. This means that there is no differentiation between short-term and long-term gains when it comes to taxing profits from cryptocurrency trading, selling, or swapping. The flat rate of 30% (plus surcharge & 4% cess) is levied on all such income, irrespective of its categorization as capital gains or business income.

Furthermore, Section 194S introduces a 1% Tax Deducted at Source (TDS) on the transfer of crypto assets from July 01, 2022. This applies when the transactions exceed Rs 50,000 (or even Rs 10,000 in certain cases) within the same financial year. The purpose of this measure is to ensure that all crypto transactions are monitored and reported by the involved parties.

Some of the crypto transactions that are liable to tax in India are:

1. Spending cryptocurrencies to purchase goods or services.
2. Exchanging cryptocurrencies for other cryptocurrencies
3. Trading cryptocurrency using fiat currency such as Rs (INR)
4. Receiving cryptocurrencies as income from mining, staking, airdrops, etc.

How to prepare yourself for filing crypto tax?

Punit Agarwal, Founder KoinX said filing crypto taxes in India can seem overwhelming, particularly if you have numerous transactions spread across different platforms and wallets. However, with proper preparation and strategic planning, you can streamline the process and ensure compliance with Indian tax regulations. Here are some tips to ensure compliance with Indian tax regulations:
1. Keep accurate records of all your cryptocurrency transactions. You can use spreadsheets or online tools to track your transactions and calculate your gains or losses for each transaction.

2. Be prepared for a tax audit by having all the necessary documentation. You may need to provide proof of your transactions such as transaction IDs, wallet addresses, exchange statements, bank statements, etc.

3. Consult with a tax professional to ensure compliance and prepare for an audit. A tax expert can help you understand the tax implications of your crypto activities and advise you on how to file your returns correctly.

4. Stay up-to-date with changes in Indian tax laws related to cryptocurrencies. The crypto tax landscape is constantly changing and evolving, so it is important to stay informed about the latest developments.

Taking the help of crypto tax software

Punit Agarwal, Founder KoinX said to simplify the process of filing crypto taxes in India, one convenient option is to utilise specialised software designed for this purpose. The crypto tax software offers a range of features to assist you with your tax obligations:

1. Importing Transaction History: These tools can seamlessly import data from various exchanges and wallets, consolidating your transaction history in one place.

2. Gain and Loss Calculations: The software employs various cost-basis methods to accurately calculate your gains and losses, taking into account factors like FIFO (First In, First Out) or specific identification.

3. Comprehensive Tax Reports: These platforms generate detailed tax reports that adhere to Indian tax laws, ensuring that you have all the necessary information for your tax filing requirements.

4. Online or Offline Tax Filing: You can conveniently file your tax returns online or offline using the tax reports generated by the software, simplifying the entire process.

These tools provide a reliable means to ensure accuracy and compliance with Indian tax regulations. While cryptocurrencies present exciting prospects and advantages as digital assets, it is important to recognise and meet the associated tax obligations. By familiarising yourself with the crypto tax landscape in India and adhering to the tips and guidance shared in this article, you can effectively file your crypto taxes and mitigate potential tax issues.