Bitcoin, NFTs taxation: Invested in cryptocurrencies? Here's how you will be taxed at buying, selling 

Taxes on cryptocurrencies: The Income Tax Appellate Tribunal (ITAT), Jodhpur, recently clarified the taxation of cryptocurrencies by ruling that profits from crypto sales should be considered as capital gains, rather than income. This decision came as a result of a case involving a former Infosys employee who successfully challenged the Income Tax Department's classification of Bitcoin as income.

The ruling not only allowed the individual to pay a lower tax rate, but also claim a Rs 4.95 crore exemption under Section 54F of the Income Tax Act.

How much tax do I have to pay? Calculate now

The taxpayer, based in Bengaluru, had invested Rs 5 lakh in Bitcoin in FY 2015-16 using funds from their salary at Infosys. Five years later, in FY 2020-21, the cryptocurrency was sold for Rs 6.69 crore, with the gains reinvested in a house purchase. Despite this, the Income Tax Department issued a notice arguing that the gains should be taxed at 30% under the VDA tax regime introduced in 2022.

The taxpayer was favored by the ITAT after reviewing the information, as they determined that the Bitcoin transaction took place before April 1, 2022, when cryptocurrencies were not clearly defined as Virtual Digital Assets (VDAs). The tribunal recognised Bitcoin as a capital asset, allowing the gains to be taxed as long-term capital gains (LTCG) at a discounted rate of 20%.

How cryptos like bitcoins, dogecoins are taxed in India?

CA (Dr.) Suresh Surana explained gains derived from the transfer of Virtual Digital Assets (including cryptocurrencies such as bitcoins, dogecoins, etc.) are taxed at a flat rate of 30% (excluding surcharge and cess), in accordance with Section 115BBH of the Income Tax Act, 1961 (hereinafter referred to as the ‘IT Act’). 

It is pertinent to note that the taxpayer would not be able to claim any deductions, except for the cost of acquisition, against such gains. As such, expenses like transaction fees, mining costs, or depreciation cannot be claimed as expenses. Further, losses from cryptocurrency transactions cannot be set off against any other income and cannot be carried forward to subsequent financial years.

Additionally, 1% TDS u/s 194S is applicable on the sale of crypto assets exceeding Rs. 50,000 in case of specified persons (Rs. 10,000 in other cases) within a single financial year. This TDS applies to both resident and non-resident taxpayers and is deducted by the platform facilitating the transaction. For the said purpose, the term “specified person” means a person:

i.           An individual or Hindu undivided family (HUF) who does not have any income under the head “profit and gains of business or profession”; and

ii.         An individual or HUF having income under the head “profits and gains of business or profession” but the turnover from business carried on by him does not exceed Rs. 1 crore or in case of profession, the gross receipts earned by him does not exceed Rs. 50 lakhs. (This threshold is to be seen in the financial year immediately preceding the financial year in which the VDA is transferred)

How are the taxes applied?

While buying

As aforementioned, a TDS of 1% is applicable on payments made for the transfer of cryptocurrencies exceeding Rs. 50,000 in a financial year for specified individuals or Rs. 10,000 for others. However, in the following cases, the above-mentioned deduction is not required to be made:

i.    the consideration is payable by a specified person and the aggregate value of such consideration does not exceed Rs. 50,000 during the financial year; or

ii.   the consideration is payable by any person other than a specified person and the aggregate value of such consideration does not exceed Rs. 10,000 during the financial year

While selling

Gains derived from sale of cryptocurrency would be taxed as aforementioned in response to Q1

Is there any annual taxation if you are keeping cryptos for long term
Merely holding cryptocurrencies (e.g., Bitcoin, Ethereum, Dogecoin) in a wallet for the long term does not attract any tax. Taxation arises only when you transfer (sell, exchange, or spend) the cryptocurrency, triggering a taxable event.

How NFTs taxation is different from cryptos
 
CA (Dr.) Suresh Surana explained taxation of Non-Fungible Tokens (NFTs) and cryptocurrencies falls under the same framework for Virtual Digital Assets (VDAs), with both being taxed at a flat 30% rate (plus applicable surcharge and cess) on gains under Section 115BBH of the IT Act. However, a key distinction lies in the treatment of losses. 

Losses incurred from the transfer of NFTs cannot be set off against gains from cryptocurrencies or other VDAs, as cross-asset loss adjustment is not permitted. This limitation requires taxpayers to assess potential losses carefully when dealing with NFTs, as these losses cannot be utilized to reduce overall tax liability from other digital asset transactions.