TAXATION OF CRYPTOCURRENCY IN INDIA: LEGAL GREY AREAS & COMPLIANCE BURDENS

Indian Cryptocurrency ecosystem has been growing rapidly in recent years, by adoption among individuals, start-ups, and investors. As the digital asset market keeps flourishing day by day it also complicates the taxation and regulatory framework making it complex, fragmented, and burdened with grey areas.

If we talk about the legal foundation i.e. India’s VDA Tax Regime, India formally introduced a tax regime for Virtual Digital Assets (VDAs) in the Union Budget 2022. This budget includes any digital representation of value including cryptocurrencies and NFTs, that can be stored or transferred electronically. Section 115 BBH of Income Tax Act, 1961 states about the income from the transfer of VDAs which is taxed at a flat rate of 30%. 

There are no deductions allowed except for the cost of acquisitions. In addition to this TDS (Tax Deducted at Source) at the rate of 1% under Section 194 S applies to transaction above certain thresholds. The process of taxing of crypto gains in India is that if someone sells their crypto holdings at a profit, the gain is taxed at 30% regardless of whether it’s a short term or a long-term holding. No indexation benefit or deduction for expenses, except for the cost of acquisition, is allowed. Also, the losses from one crypto cannot be set off against gains from another and can n it be carried forward to future years. 

There are three ways through which you can receive the crypto, those are Mining, Airdrops and staking. So if we talk about the crypto currency received through mining is considered as self- generated and taxed under the category of “income from other sources”. The acquisition cost for future capital gains in this case is the fair market value on the date of receipt. Token received via airdrops are also taxed at the time of receipt as income. If these are sold later, capital gains tax applies on the appreciation. Where Crypto is locked to validate transactions, returns from staking are treated like interest income and taxed accordingly. 

There are lack of specific guidance creates confusion for taxpayers and tax authorities alike. When cryptocurrency is used to buy goods or services, it is treated as if it has been “sold” which triggers capital gains tax, in addition to the GST liability on the goods or services. It results in double taxation i.e. once on the crypto gain and again on the purchase and this burdens merchants and users alike and discourages the real- world use of crypto for payments. 

The treatment of cryptocurrencies in Goods and Services Tax (GST) is murky unlike the clear income tax rules because the GST Law does not define cryptocurrencies which leads to confusion, in practice, crypto exchanges are charged 18% GST on service fees, it is unclear if GST applies to crypto itself as a “good” or a “service” when traded between individuals. This regulatory gap creates compliance risks, especially for Indian exchanges and start-ups who may face retrospective tax claims. The compliance burdens for investors and businesses are that VDA income must be disclosed by the taxpayers and if failed to do so can invite penalties or prosecution. 

1% TDS must be deducted by every crypto buyer when buying crypto from an Indian resident creating a compliance burden for casual users, especially those using peer to peer platforms. If we consider the reporting ambiguities, it includes no clarity on whether foreign wallets or foreign exchanges need to be reported, variations of valuation of airdrops and staking rewards across platforms, triggering of FEMA (Foreign Exchange Management Act) compliance by Crossborder transfers adding another layer of legal complexity. 

NFTs are also treated like Crypto (Virtual Digital Assets) under Indian law but there’s a caveat which is, if the ownership represented by NFT is a physical, legally enforceable asset (like a piece of art or a music CD), it may be excluded from the VDA category but if it is purely digital (e.g. in-game items, profile pictures), it is taxed just like crypto i.e. at 30% on transfer, with 1% TDS, which again creates confusion about how to treat hybrid NFTs or utility- based tokens. 

Despite formal taxation provisions, several legal questions remain unquestioned like Is crypto a currency, asset, or commodity because different laws imply different things, Can the profits from cryptos be treated as business income from frequent traders? What are the FEMA and RBI compliance obligations for crypto sent abroad? Until these questions are answered through official guidelines or case law, users remain at legal risk. 

If we conclude all of it we come to one thing which is there is a need for balanced regulation. There are several important steps being taken by India by introducing a clear tax regime for crypto and NFTs. However, the policy is still evolving, and many areas are still uncertain or over regulated. For India to become a innovation hub, simplification of crypto tax regime must be done by policy makers and offer relief for long term holders. .

 By: Chelsi Malik