The Indian government has not yet assigned cryptocurrencies legal currency recognition. In 2018, the RBI attempted to place restrictions by prohibiting banking services from cryptocurrency exchanges. 

The restriction, ultimately, was overturned by the Supreme Court on constitutional grounds and the fundamental rights of digital trades. The income tax administration has not yet provided any explanation on the tax consequences of crypto trade profits.

Taxes on Cryptocurrency

As declared by Finance Minister Nirmala Sitharaman during the presentation of the Union Budget 2022, cryptocurrency holdings would be taxed beginning April 1, 2022, and some amendments to income tax regulations will be introduced. 

Tax on cryptocurrencies and other digital assets is one of the announced amendments. In the Union Budget 2022, Nirmala Sitharaman declared that any revenue derived from the exchange of any virtual digital property will be taxable at a rate of 30%.

The goods and services tax (GST) council is considering a 28 percent tax on cryptocurrencies, similar to the present GST on casinos, betting, and lottery. This might further impact the attitude towards crypto investment in India. According to sources, if the idea is approved at the next GST council, activities like crypto mining and transactions would be subject to the 28 percent GST.

India differentiates between cryptocurrency and crypto commodities, and Union Finance Minister Nirmala Sitharaman declared a 30% tax on profits from cryptocurrency exchanges during the Union Budget 2022-23 in February, which comprises a 1% deduction at source.

Why the Need to Tax Cryptocurrency?

In the Union Budget 2022, the Finance Minister stressed the need to tax cryptocurrency and its activities. To tax digital assets, a new provision named ‘115BBH’ has been inserted into the Income Tax Act of 1961. 

The global nature of the cryptocurrency industry highlighted the necessity for a regulatory structure that is suitable for all governments to avoid its use to laundering funds and support terrorism, which are both major problems for a nation like India.

Summary of the Amendment

The summary of the proposed tax system implied on cryptocurrencies are as follows:

1. Income from the exchange of virtual currencies such as cryptocurrency and NFTs will be taxable at 30%.
2. Excluding the cost of purchase, no deductions will be permitted when declaring revenue from the transfer of digital assets.
3. Digital asset losses cannot be offset against other revenue.
4. Offering digital assets will result in taxation in the possession of the recipient.
5. Liabilities from one virtual digital currency cannot be offset against gains from another virtual digital money.
6. Liabilities from one cryptocurrency could not be offset against profits from some other online digital currency.
7. Infrastructure expenses paid when processing crypto assets will not be considered purchase costs.

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