HomePersonal FinanceIncometaxTax Calculation on Cryptocurrency Earning with Example

Tax Calculation on Cryptocurrency Earning with Example

Tax Calculation Cryptocurrency – Cryptocurrency is an emerging digital asset. Many Indian’s are investing in Crypto. Looking at growing popularity and lucrative gains government has announced 30% flat tax on income from the transfer of virtual digital assets (VDAs) including cryptocurrencies and NET. No deduction and exemption will be allowed. This is as per the latest budget 2022 – crypto tax announcement.

Indian crypto community must be disappointed and looking for more information like – How to calculate cryptocurrency tax? Will you have to pay tax on both gains and losses from crypto? Crypto Gifts will be taxable or not? So, here are answers to all your queries.

Tax Calculation on Cryptocurrency

What are Virtual Digital Assets & NFT?

Virtual Digital Asset is a newly inserted nomenclature for income tax purposes by the government. It is clearly said that VDA means any information or code or number or token generated through cryptographic means, blockchain technology or otherwise and which can be traded, transferred or stored electronically.

The definition of VDA also includes Non-Fungible Token (NFT) a unit of unique data stored on a blockchain, a form of digital ledger, allowing anyone to verify its authenticity and who owns it.

The Finance Bill also authorizes the government to specify any other digital asset as a VDA or exclude any digital asset from the definition of VDA.

This means all virtual currencies (around 1500) such as Bitcoin, Litecoin, Ethereum, Dogecoin, Ripple, etc fall under this regime.

Does it mean that Cryptocurrency made Legal in India?

No, it does not mean that cryptocurrency is made legal in India. The word virtual digital asset is used while making the announcement and not the currency. This means that the government has not yet granted any legal tender to decentralized cryptocurrencies.

Despite any legal status tax is imposed by classifying crypto as a digital asset by the Indian government. In the USA it is classified as property and capital gain tax is applicable on the gain on sale of cryptocurrencies.

As per me, the government of India wants to discourage cryptocurrency investment that’s why such a higher tax is announced on crypto.

How to calculate Tax on Cryptocurrency?

Any income earned from the transfer of virtual digital assets shall be taxed at the rate of 30%. This income is considered an additional source of income. Let’s try to understand this by example.

Mr.X has invested 3 Lakh in Bitcoin (or any other cryptocurrency) and sold that bitcoin in 5 Lakh. The total profit (income) arising from the above transaction is 2 Lakh.

  • X has a total taxable income – 10 Lakh
  • Income from transfer of VDA – 2 Lakh

Tax liability in the above case

  • Tax Liability on VDA – 30% on 2 Lakh = Rs.60000
  • Tax Liability on other income 8 Lakh as per applicable slab rate.

1% TDS will be applicable on all cryptocurrency transactions.

This can also be called as nft taxes.

Note – Above rule is applicable from 1st April 2022. (AY 2023-24). This means income from all crypto transactions in FY 2022-23 will be taxed at the rate of 30%.

Will you have to pay tax on both gains and losses from crypto? 

Any losses arising from the transfer of crypto assets cannot be set off against any other income and cannot be carried forward. However, you can set off losses against gains arising from the transfer of crypto assets in the same financial year.

Example –

Mr.X has a total taxable income of 10 Lakh. Mr.X has invested in Bitcoin and Ethereum (virtual digital assets) and gained 5 Lakh on the sale of bitcoin and incurred a loss of 2 Lakh on the sale of Ethereum. Mr.X can set off loss against the gain from the crypto assets. This means only 3 Lakh on the mentioned transaction would be taxed @30%. Adjustment of 2 Lakh loss can be done. (as both transactions are in crypto asset class).

Tax liability in the above case

  • Tax Liability on VDA – 30% on 3 Lakh = Rs.90000
  • Tax Liability on other income 8 Lakh as per applicable slab rate.

Any losses that occurred in cryptocurrency cannot be set off against profit arising from any other asset class. This means if you make a profit in a mutual fund and loss in the cryptocurrency you cannot set off losses as asset class is different.

Crypto Gifts will be taxable or not?

In addition to crypto investment, if you receive any Crypto Gift or NFT as a gift (airdropped token), you need to pay tax on the same. Tax is payable in case you sell this gift and make a profit. This means income arising from the crypto gift is also taxable.

Do I need to pay tax on holding crypto currency?

No, tax is applicable only when you sell a digital asset (cryptocurrency). You need to pay any tax for holding cryptocurrency. However, 1% TDS is applicable on the transaction. It is for effective monitoring of crypto transactions.

Final Words

Imposing a tax on virtual digital assets is a very good step towards the indirect regulating crypto transaction. This will help in generating revenue. However, crypto investors and traders are surely disappointed with the proposed tax. What is your take on the crypto tax? Do share your views in the comment section.

Shitanshu Kapadia
Shitanshu Kapadiahttp://moneyexcel.com/
Hi, I am Shitanshu Kapadia founder of moneyexcel.com. I have written 1800+ articles on this blog. I am PGDBA(marketing), engaged in blogging for 10 years. Moneyexcel blog is ranked as one of the Top 10 Personal Finance Blog in India. The purpose of this blog is to spread financial awareness and help people in managing money. Please note that the views expressed on this Blog are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.
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