Bitcoin and other cryptocurrencies have been experiencing significant gains recently, leading many investors to consider cashing out.
If you fall into this category, it’s essential to understand the tax implications related to cryptocurrencies and virtual digital assets (VDAs) in your country. This includes everything from capital gains tax to taxes on NFTs and airdrops.
Tax on Crypto Gains:
In India, profits from crypto assets are taxed at a flat rate of 30%. This means you must pay a 30% tax on any gains from the sale or transfer of crypto assets like Bitcoin or Ethereum, regardless of your income tax bracket. A 1% Tax Deducted at Source (TDS) applies to every crypto transaction.
Unlike stocks or mutual funds, losses from one crypto asset cannot be offset against gains from another. Therefore, even if you sell Bitcoin for a profit, you must still pay a 30% tax on that gain, even if you incur losses from Ethereum. There are no deductions for losses on Ethereum.
Capital Gains:
The First-In-First-Out (FIFO) method calculates gains on crypto assets. This method assumes that the crypto you purchased is the first to be sold.
For example, if you bought one Ethereum on January 1, 2024, followed by two more on November 1, 2024, and then sold two Ethereum on November 12, 2024, the Ethereum acquired in January will be identified as sold first, with one of the remaining two being considered sold as well. Capital gains are calculated based on this method.
Taxes on Payments, Airdrops, and NFTs:
a) Crypto Payments: If you receive cryptocurrency as payment, it is considered income. The asset’s value is determined by its fair market value on the day you receive it.
b) Airdrops: These are free tokens for holders in marketing campaigns. You are taxed at 30% on the fair market value of the token on the date you receive it. If you later sell, exchange, or use these tokens, you will also pay a 30% tax on any additional gains.
c) NFTs (Non-Fungible Tokens): Profits from selling NFTs are also taxed at 30%, with only the initial cost of acquiring the NFT deductible from the profit.
Key Points for Filing Crypto Taxes:
a) Declare All Wallets: Ensure that your income tax filing includes all centralized, international, and decentralized finance (DeFi) wallets.
b) TDS Tracking: The total TDS collected from your trades through exchanges will be accurately reflected in your tax documents, particularly in Form 26AS linked to your Permanent Account Number (PAN) card.
c) No Carry Forwards: Indian tax laws do not permit offsetting crypto losses against profits or carrying them forward to future years.
This means any tax due on profits must be paid annually. It is advisable to seek assistance from Chartered Accountants (CAs) if needed.