Cryptocurrency Tax Implications 2023 

What is Crypto Taxation? Cryptocurrency today has many traders under it. Surprisingly, This number is growing large in India, as per a survey approximately 20% of the Indians own some form of Crypto, while about 57% plan to be a part of the crypto sector underart of this huge crowd. 

The Union Parliament Decision on Crypto Taxation

The Indian Union Parliament has taken significant steps to regulate cryptocurrency trading. In March, the government brought the crypto sector under the provisions of the Prevention of Anti-money Laundering Act 2002 (PMLA).

According to this Act, cryptocurrency entities are now required to maintain records, monitor compliance, and report suspicious activities. Key tax changes came into effect on April 1, 2022, with a 30% tax rate, and on July 1, 2022, a 1% Tax Deducted at Source (TDS) was implemented.

Principles of Crypto Taxation

Portfolio Building: In India, investors cannot offset losses in one cryptocurrency with gains in another. It's advisable to focus on a select list of assets rather than spreading investments across multiple assets.

Given the higher tax rate (30%) on crypto compared to other assets, allocating a small percentage (3-5%) of the overall portfolio to crypto is recommended.

Choosing the Right Exchange:

Global exchanges may not comply with Indian regulations regarding TDS deduction and record keeping. Investors should trade on Indian exchanges that adhere to the necessary legal requirements, despite the initial KYC hurdles.

Record Keeping:

To comply with Indian crypto tax laws, investors must maintain meticulous transaction records, including purchase dates, acquisition costs, and sale or transfer dates.

Additionally, they should record the number of crypto assets held and their values at the time of each trade. Many Indian exchanges can assist in managing and displaying these records.

Calculating and Paying Taxes:

The government can now track all crypto trades retrospectively. Investors must declare their crypto and NFT gains annually and ensure the accuracy of their tax filings. Several platforms can help consolidate transaction spreadsheets for tax reporting.

Recovering TDS:

Investors who sold crypto assets during the year would have paid 1% TDS. If no additional taxes are owed at year-end, this amount can be recovered by declaring it to the government.

Likewise, There are some other countries that receive capital gains when people trade in Crypto;

Italy: In 2022, Italy classified cryptocurrency as a financial instrument and applied a 26% capital gains tax when the portfolio's value exceeds 2000 Euros.

United Kingdom: The UK levies taxes on crypto income or capital gains, with rates ranging from 10-20%.

United States: In the USA, selling crypto for fiat, receiving token airdrops, mining, staking, or trading one token for another all incur taxes, with rates varying from 0-37% for capital gains and income tax.

Portugal: Cryptocurrency in Portugal is considered capital income or self-employment income, with passive income taxed at 28%, and mining, validation, and token issuance taxed between 14.5-53%.


What Follows?

A competitor of WazirX said the tax contributed to a 97% decline in volumes at domestic exchanges within a year.

The introduction of a 1% TDS on crypto transactions in India led to a significant drop in trading volumes, affecting exchanges' competitiveness. While the move toward legitimizing crypto as an asset class in India was welcomed, the tax laws had unforeseen implications.

Under these tax laws, ancillary expenses such as professional consultations and intermediary fees cannot be deducted from crypto asset income.

This limitation raises concerns among traders about investing in products or services that could enhance their investment strategies. Additionally, those engaged in crypto mining cannot offset the costs of hardware against their gains when selling mined crypto, potentially hindering new investors' success prospects.