All You Need to Know about Taxes on Cryptocurrency and Bitcoin

Key Takeaways

• Under Section 115BBH of the Income Tax Act, profits from crypto trading, exchanges, and payments are taxed at 30% plus a 4% cess.

• A 1% TDS applies to transactions exceeding ₹10,000.

• Unlike stocks, crypto losses cannot be used to offset gains from other assets or income sources.

• From FY 2025-26, individuals and exchanges must disclose crypto transactions in Schedule VDA of their income tax filings.

Cryptocurrencies are a unique kind of digital currency with which you can trade without the control of a centralising authority. Since their prices fluctuate, they are becoming popular trading avenues. However, the Government of India introduced the Finance Act 2022 with a framework to treat cryptocurrencies as Virtual Digital Assets (VDAs). 

This Act makes income from the transfer of VDAs taxable as per the applicable rules. If you are planning to invest in crypto, understand the taxes on crypto, and set your budget accordingly. 

To explain it in easy terms, cryptocurrencies are digital money that operate without intermediaries, like banks, financial institutions, or central authorities. With the growing popularity of digitalisation, the trading of cryptocurrencies has become popular in recent years. Today, there are more than 10,000 digital currencies, such as Bitcoin, Ethereum, Ripple, Matic, etc.

The Income Tax Act classifies crypto and NFTs as Virtual Digital Assets (VDAs) under Section 2(47A). VDAs include all crypto assets like cryptocurrencies, NFTs, and tokens but exclude gift cards and vouchers. Hence, you are liable to pay tax on bitcoin gains. 

As per the Finance Act of 2022 and other related provisions, here is the tax structure applicable  to the transfer of cryptocurrencies:

There have been myriad changes in the laws regarding cryptocurrency taxes over the years. Take a look: 

When filing your returns, you can only claim tax deductions for the cost of acquisition from the sale of cryptocurrencies. Transaction charges and other related costs don’t qualify for deductions. Also, remember that you cannot offset losses from VDAs to gains for any other income or losses from one VDA to gains.

Crypto volatility impacts taxes by changing the gains or losses investors report. Taxes are based on the difference between the purchase and sale prices. In volatile markets, investors may face higher or lower taxable gains. 

Even with fluctuating prices, taxes apply only to realised gains (when you sell or exchange crypto), not unrealised changes. You must keep accurate records to report these fluctuations correctly. 

Here are the details to help you understand when you need to pay tax on crypto transactions:

The process of reporting taxes varies based on the method you are using. However, here’s a step-by-step guide on how to report crypto to the Income Tax Department easily and quickly:

1. Open a cryptocurrency taxes calculator and sign in to connect.

2. Download the tax report from there.

3. Now, log in to the income tax portal.

4. Report your capital gains in Schedule VDA.

5. Proceed to verification and complete the report.

Here are common mistakes to avoid when paying crypto taxes:

• Failing to report all crypto transactions like trades, sales, and moving it into a digital wallet.

• Not understanding the differences between long-term and short-term crypto gains.

• Not keeping detailed records of each transaction, including dates and amounts

• Ignoring crypto tax laws.

• Ignoring losses that can offset gains (tax loss harvesting).

• Overlooking the 1% TDS on crypto transactions exceeding ₹10,000.

• Underestimating tax liabilities by not considering fees and transaction costs.

• Not staying updated with changing tax regulations and requirements.

Many countries treat cryptocurrencies as property, taxing gains from their sale or exchange as capital gains. Earnings from activities like mining, staking, or receiving crypto as payment are often considered taxable income. Tax rates on crypto gains can vary depending on the capital gain. 

1. How is Bitcoin taxed?

In India, crypto gains are taxed at 30% (plus a 4% cess) and a 1% Tax Deducted at Source (TDS) applies on transactions over ₹10,000.

2. What tax laws apply to cryptocurrency investments?

The Union Budget 2022 marked India's first legal recognition of crypto assets by imposing taxes on them. Under Section 115BBH of the Finance Bill, taxable events include:  

• Converting digital assets to INR or any fiat currency

• Trading one virtual digital asset for another, including crypto-to-crypto and stablecoin transactions

• Using virtual digital assets to pay for goods and services

Profits from these transactions incur a 30% tax, equal to India's highest income tax bracket. Additionally, transactions exceeding ₹10,000 face an extra 1% TDS.

3. How do I calculate taxes on Bitcoin gains?

You can use the calculator available online to calculate your gains. All you have to do is enter the sell and purchase price of the crypto. The step-by-step process may vary depending on the platform you are calculating. If you want to do it manually, use the following formula: 

Profit or Loss = Proceeds - Cost Basis

4. What are the common mistakes in reporting crypto taxes?

Failing to report all crypto transactions is arguably the most common mistake investors make. Also, not keeping detailed records of transactions and ignoring the 1% TDS on crypto transactions are some of the oft-made errors. 

5. Are cryptocurrency transactions taxed differently across countries?

Yes, different countries have different regulations on the payable tax on crypto. So, if you are planning foreign trading, be familiar with the specific country’s tax rules. 

6. What crypto tax rates should investors be aware of?

The 30% tax on the capital gain applies to numerous types of transactions. You should be aware of these. People also ignore that exceeding ₹10,000 in transaction value leads to an extra 1% TDS.

7. Can I claim tax deductions for cryptocurrency losses?

You can’t claim a deduction for crypto-related expenses except for the cost of acquisition. 

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