Cryptocurrencies and virtual assets are the new generation's assets and
payment modes. The concept of cryptocurrency took its boom after the sudden
rally of Bitcoin in 2009. The rapid growth of Bitcoin made people invest and
trade in cryptocurrencies. Starting from its establishment in 2008, the market
valuation of cryptocurrency assets experienced a remarkable rise, reaching a
record-breaking sum of around USD 3 trillion by November 2021.
Nations across the globe are currently grappling with the challenge of
integrating cryptocurrencies into their taxation frameworks. it's logical that
numerous countries face difficulties grasping this revenue source's essence.
Advanced economies tend to adopt a more straightforward method for taxing
cryptocurrency earnings when compared to developing economies. Notably,
cryptocurrencies exhibit a dual character, serving as both a medium of exchange
and an investment asset.
Consequently, the determination of the precise nature of this income becomes
increasingly intricate for all nations involved. Every nation determines the
nature of cryptocurrency according to its domestic taxation framework. In India,
the Finance Act 2022 was the first legislation that talks about cryptocurrencies.
In 2018, the Reserve Bank of India (RBI) released a circular, prohibiting
entities from engaging in transactions involving virtual assets and rendering it
unlawful for financial institutions to furnish services to cryptocurrency
exchanges. However, this ban was subsequently overturned by the Supreme Court on
March 4, 2020.
The court ruled that the ban contravened Article 19(1)(g) of the Indian
Constitution, which safeguards the "Right to practice any profession or to carry
on any occupation, trade or business." As of now, there is no Indian legislation
that explicitly labels cryptocurrencies as illegal, thereby establishing the
legality of cryptocurrencies within India. The following are the different forms
of crypto income and taxation framework in India.
Definition of cryptocurrency:
According to Merriam-Webster Cryptocurrency means "any form of currency that
only exists digitally, that usually has no central issuing or regulating
authority but instead uses a decentralized system to record transactions".
The Finance Act 2022 made an amendment to the Income Tax Act, of 1961, and added
Section 2(47A) (a). This act clearly states that cryptocurrencies are considered
Virtual Digital Assets (VDA).
Virtual Digital Assets (VDA):
Section 2 (47A) (a) of income tax (amended act) 2002, Virtual Digital Assets (VDA)
means any information or code or electronically".(not being Indian currency or
foreign currency), generated through cryptographic means or otherwise, by
whatever name called, providing a digital representation of value exchanged with
or without consideration, with the promise or representation of having inherent
value, or functions as a store of value or a unit of account including its use
in any financial transaction or investment, but not limited to investment
scheme; and can be transferred, stored or traded electronically"
Different Forms of Cryptocurrency Income:
Typically, income generated from cryptocurrencies is considered passive in
nature. The financial sector offers an extensive array of passive income
avenues, including bank deposits, the stock market, bonds, and more. In recent
times, cryptocurrencies have also become a prominent component of passive income
strategies adopted by individuals worldwide. The revenue derived from
cryptocurrencies encompasses a variety of methods. The following are some of the
most widely utilized approaches globally for earning profits from
A common method involves putting money into cryptocurrencies like Bitcoin or
Ethereum. Similar to buying stocks, you hold onto these digital assets for a
while. If their value goes up, you make a profit when you sell them for more
than what you paid. The difference between the buying and selling prices
determines how much money you gain or lose.
It involves validating transactions and adding them to a blockchain network
using computer power. Many cryptocurrencies utilize a system called
Proof-of-Work (PoW) for this purpose. Miners receive rewards in the form of the
respective cryptocurrency for verifying transactions. The mining process
encompasses tasks like validating transactions, performing complex computations
(proof of work), adding new blocks to the blockchain, and bolstering network
Airdrop is like giving away free tokens, cryptocurrencies, or coins to specific
people who meet certain requirements. It's a clever way to promote and market
these digital assets by rewarding loyal customers and introducing a new currency
to the public. Airdrops can be quite diverse, depending on the type of currency
and tokens being distributed.
Staking involves keeping a specific number of cryptocurrencies in a wallet
linked directly to a network. These held coins contribute to the network's
security and operations. The earnings from staking come in the form of rewards.
To get these rewards, individuals need to participate in a Proof-of-Stake (PoS)
or Delegated Proof-of-Stake (DPoS) blockchain network.
Earning cryptocurrency through gaming is remarkably straightforward, as numerous
gaming platforms utilize crypto as a form of reward. Many games worldwide
operate on the Play To Earn (P2E) idea. Various games present distinct ways of
rewarding players with tokens. These rewards can differ significantly from one
game to another, adhering to the specific terms and conditions of each game.
Taxation of crypto income in India:
In India, we have two different taxes 1. Income Tax (Direct Tax) and 2. Goods
and Services Tax (Indirect Tax). The following is the tax rate on
cryptocurrencies in India.
GST on VDA transactions:
- Income Tax:
The Finance Act of 2022 introduced Section 115BBH to the Income Tax Act,
which stipulates that gains stemming from Virtual Digital Assets (VDA)
transactions are subject to a tax rate of 30%, along with an additional 4%
cess. Commencing on July 1, 2022, Section 194S mandates a 1% Tax Deducted at
Source (TDS) on the transfer of cryptocurrency assets. This applies when
transactions surpass ₹50,000 (or in specific cases, ₹10,000) during the same
It's now obligatory for all exchanges dealing with Virtual Digital Assets to
deduct TDS and report it to the government. The total TDS amount deducted
can be claimed using Form-6A. Income acquired from Virtual Digital Assets
encompasses all forms of income, which means any income gained through
activities related to VDA is subject to taxation in the same manner.
This includes activities like Mining, Trading, Staking, Airdrop, token
vesting, referrals, and even crypto gifts exceeding ₹50,000. Section 115BH
(a) Income Tax (amended act) 2022 "the amount of income-tax calculated on
the income from transfer of such virtual digital asset at the rate of thirty
Set-off and carry forward of losses:
Certainly, under Section 115BBH(2), there are limitations on setting off and
carrying forward losses. This implies that apart from the cost of
acquisition, if applicable, no deductions related to expenses, allowances,
or the offsetting of losses will be permitted to the taxpayer under any
provision of the Income Tax Act. let's consider Mr. X. He invested Rs 60,000
in Bitcoins and later sold them for Rs 80,000. Additionally, he purchased
Ethereum worth Rs 40,000 and sold it for Rs 30,000. During these
transactions, a trading fee of Rs 2,000 was deducted by the exchange.
Under the given scenario, the loss of Rs 10,000 from the Ethereum trade
cannot be offset by the gains of Rs 20,000 from the Bitcoin trade. The
entire income of Rs 20,000 will be subject to a tax rate of 30%. Moreover,
the trading fee of Rs 2,000 cannot be subtracted from the gains for tax
- Goods and Service Tax:
In India, the Goods and Services Tax (GST) is levied on the supply of goods
and services. If GST is applicable, the supplier is required to include the
GST in the pricing of their supply and subsequently pay it to the
government. Simultaneously, the recipient of the supplied goods or services
generally has the right to claim a credit for the Goods and Services Tax (GST)
that they've paid on that supply. This credit can be used to offset any GST
liability the recipient has for their own provided goods or services.
While the GST Act does not explicitly address cryptocurrencies, the Finance
Act of 2022 has prompted the Central Board of Indirect Taxes and Customs (CBIC)
to clarify that cryptocurrencies are not considered currencies or mediums of
exchange. Instead, they are categorized as goods and services. As a result,
the supply of cryptocurrencies is subject to GST at a rate of 18%. This
means that when cryptocurrencies are traded or transacted, a Goods and
Services Tax of 18% is applicable to those transactions.
When an individual obtains cryptocurrency for the purpose of investment, the act
of acquisition usually does not trigger Goods and Services Tax (GST). This is
due to the fact that acquiring a capital asset like cryptocurrency is not
considered a taxable transaction according to GST regulations.
Likewise, when an individual sells cryptocurrency that they have held as an
investment, the transaction typically does not involve GST. This exemption is
based on the principle that selling a capital asset, including cryptocurrency,
is not treated as a taxable supply under GST regulations. In essence, GST is not
levied on the capital gains arising from the sale of cryptocurrency held for
GST on VDA for the medium of exchange:
When an individual uses cryptocurrency to either buy or sell a product or
service, that transaction becomes subject to Goods and Services Tax (GST). This
is because the act of using cryptocurrency as a means of payment is treated as
an exchange for the supply of goods or services. In such cases, the supplier is
obligated to levy GST on the value of the provided goods or services.
Furthermore, when a payment is executed using any form of Virtual Digital Asset
(VDA), the supplier should collect GST based on the value of the supply they've
India currently faces a significant gap in terms of a comprehensive legal
framework governing cryptocurrencies and digital assets. While the Finance Act
of 2022 introduced initial regulations for Virtual Digital Assets (VDAs) and
their taxation, there are concerns about the fairness and potential legal
challenges associated with the tax provisions outlined in this act.
The primary question revolves around how to categorize the income derived from
VDAs. If VDAs are considered assets, any resulting gains should be treated as
capital gains, allowing for the utilization of losses incurred for offsetting
and carrying forward. The imposition of a 30% tax rate on such gains could be
seen as lacking in fairness and reasonableness.
Furthermore, there are potential concerns that the tax provisions introduced
might not fully align with the principles of natural justice. This points to a
need for further clarification and potentially more balanced tax regulations in
the evolving landscape of cryptocurrencies and digital assets in India.
Written By: Bhagavath P
- Income Tax (Amended) Act, 2022 - No. 24 Acts of Parliament, 2022(India)
- Constitution of India 1950
- Merriam-Webster https://www.merriam-webster.com/dictionary/cryptocurrency
(Fifth year BBA.,LL.B) - IFIM Law School,