Tips To Save Tax on Cryptocurrency
The newest and most popular trend in the global financial sector is investing in cryptocurrencies. These digital currencies are not governed by governments or other centralized financial organizations. However, the revenue obtained from its sale, exchange, or transfer is still subject to taxation by the government.
Continue reading to learn more about some of them.
Latest updates on crypto tax in India 2024
The Interim Budget couldn’t make needed tax changes for cryptocurrencies. But now, there’s hope for better rules in the upcoming full Budget. We’re asking the government to allow offsetting losses, lower the tax rate on Virtual Digital Assets (VDAs) to 0.01%, and treat VDA income like other investments.
When is Cryptocurrency Taxed?
You do not need to pay taxes to acquire a cryptocurrency; they are tax-free on their own. For taxation reasons, the IRS views cryptocurrency as property, which means:
- If you sell or use Bitcoin in a transaction, you must pay taxes on it.
- Cryptocurrency payments made for commercial purposes are subject to taxation as business income
What are cryptocurrencies?
Cryptocurrencies are digital or virtual currencies that utilize cryptography for security and operate on decentralized networks, typically based on blockchain technology. Unlike traditional currencies issued by governments (fiat currencies), cryptocurrencies are not controlled by any central authority, such as a central bank or government.
Key characteristics of cryptocurrencies include:
- Decentralization: Cryptocurrencies typically operate on decentralized networks of computers, often referred to as blockchain technology. This means that no single entity has control over the currency, and transactions are recorded on a distributed ledger that is maintained by multiple participants in the network.
- Cryptography: Cryptocurrencies use cryptographic techniques to secure transactions and control the creation of new units. This ensures the integrity and security of the currency and its transactions.
- Anonymity and Pseudonymity: While transactions on the blockchain are typically transparent and traceable, the identities of the parties involved in the transactions can be pseudonymous or anonymous, depending on the cryptocurrency and how it is used.
- Digital nature: Cryptocurrencies exist purely in digital form and have no physical counterpart like traditional currencies such as cash or coins.
- Global accessibility: Cryptocurrencies can be sent and received anywhere in the world with an internet connection, enabling borderless transactions without the need for intermediaries such as banks or payment processors.
- Limited supply: Many cryptocurrencies have a predetermined maximum supply or a controlled issuance schedule, which can help prevent inflation and maintain scarcity, similar to precious metals like gold.
Bitcoin, created in 2009 by an anonymous entity known as Satoshi Nakamoto, is the first and most well-known cryptocurrency, but there are now thousands of different cryptocurrencies with various features and use cases, including Ethereum, Ripple, Litecoin, and many others.
Various Cryptocurrency Tax-related Events
Here is the list of the different tax-related events in India:
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Taxable Events
- Converting cryptocurrencies into fiat cash, or money issued by the government
- Purchasing and paying for products, services, or assets
- Transacting in cryptocurrencies by exchanging one for another
- Getting coins that have been mined or forged
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Non-Taxable Events
- Purchasing cryptocurrency with fiat currency
- Making a Bitcoin donation to a charity or non-profit organization
- transferring Bitcoin to a third party as a gift (subject to gifting exclusions)
- Cryptocurrency exchange between wallets
Examples of Cryptocurrency Tax Events
With cryptocurrency, buying anything is simpler than ever. You must pay sales tax and establish a taxable capital gain or loss event at the time of the sale to take advantage of this convenience, though.
- You send the cryptocurrency to the retailer through their wallet and any applicable sales tax.
- You have produced a taxable event with a realized capital gain if the value of your cryptocurrency is greater now than it was when you first bought it. You suffer a capital loss if it’s less. Each must be recorded throughout tax season.
- You must record the amount you spent and its fair market value at the time the transaction occurred since it was a taxable event.
Therefore, if the value of your cryptocurrency has grown, you will be subject to both sales tax and capital gains tax while using it.
Purchase of Cryptocurrency
Both you and your seller in this transaction will be subject to tax consequences.
- Based on the fair market value of Bitcoin at the time of the transaction, the seller is required to declare the transfer of funds as gross income.
- Due to the fact that you cashed out an investment to make a purchase, you must record the transaction as a capital gain. The profit is the difference between the price of the bitcoin at the moment of purchase and its market value.
Getting Paid with Cryptocurrency
The entire amount you spent in fees and money is the cost basis for cryptocurrencies. If you have a gain, the remaining sum is what gets taxed.
Your cryptocurrency-related taxable gains (or losses) are recognized as capital gains or capital losses, just as with traditional assets.
Cryptocurrency Exchange
Tax liability arises from bitcoin exchanges as well. For instance, if you use one cryptocurrency to buy another, you are basically exchanging one for the other. Any profits or losses on the cryptocurrency you exchanged must be reported.
By providing free exports of all trading data, several exchanges assist cryptocurrency traders in maintaining the organization of all this information. This can be used to calculate the trader’s tax obligations by the trader or the trader’s tax advisor.
Tips: Save Tax on Cryptocurrency in India [2023 Guide]
The following is some of the greatest advice from Vakilsearch for lowering your crypto tax:
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Keep your Cryptocurrency for the long haul.
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You can reduce your tax liability as a result. If you sell your investments in less than a year, you will have made a short-term financial gain.
The capital gain that is on long-term crypto tax assets will be substantially lower than quick capital gain taxation. After a year, sell your Bitcoin if you want to. You will save more money on taxes because of the low tax rate.
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Get a Sideways look at Cryptocurrencies
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Getting indirect exposure to cryptocurrencies is one of the best ways to lower your crypto taxes. It’s interesting to note that several newly introduced portfolios by different international investment platforms enable Indian cryptocurrency investors to have exposure to a specific digital currency without purchasing it or directly investing in it.
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Maintain your winnings in Stablecoins.
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Stablecoins are less volatile than other cryptocurrencies like Bitcoin since their value is tied to another coin, product, or financial instrument. You are less likely to suffer a long-term capital loss by investing in them as a consequence.
What Are Some Common Mistakes to Avoid When Trying to Save On Crypto Taxes?
When trying to save on crypto taxes, it’s essential to be aware of potential mistakes that could lead to costly consequences or even legal issues. Here are some common mistakes to avoid:
- Failure to Report Crypto Transactions: Some individuals may overlook or intentionally not report their cryptocurrency transactions, especially if they are using decentralised exchanges or peer-to-peer platforms. However, tax authorities are increasingly cracking down on unreported crypto transactions, and non-compliance can result in penalties and interest charges.
- Misreporting or Underreporting Gains: Incorrectly calculating the gains or losses on your cryptocurrency trades can lead to inaccurate tax filings. Make sure to accurately record the purchase price, sale price, and any associated fees or expenses to determine the correct capital gains or losses.
- Ignoring Tax Obligations for Airdrops and Forks: Airdrops and forks can create taxable events. If you receive new tokens through a fork or as part of an airdrop, you may need to report and pay taxes on the fair market value of the new tokens received.
- Neglecting to Keep Proper Records: It’s crucial to maintain detailed records of all your cryptocurrency transactions, including dates, amounts, cost basis, and fair market values. Good record-keeping will help you accurately calculate your gains and losses and support your tax filings in case of an audit.
- Confusing ‘Like-Kind’ Exchanges: Before 2018, some taxpayers claimed that crypto-to-crypto trades qualified for like-kind exchange treatment under U.S. tax law. However, after tax reform in 2017, the IRS clarified that like-kind exchange treatment only applies to real property, not cryptocurrencies. Therefore, crypto-to-crypto trades are generally considered taxable events.
- Not Considering Tax implications before Gifting or Donating Crypto: Giving cryptocurrency as a gift or making charitable donations using crypto can have tax implications. Both the giver and the recipient may have tax responsibilities, so it’s essential to understand the tax rules before engaging in such transactions.
- Overlooking the use of Crypto for Purchases: Spending cryptocurrencies for goods and services is considered a taxable event, similar to selling it for fiat currency. Failure to report these transactions could lead to inaccurate tax filings.
- Failing to Seek Professional Advice: Cryptocurrency tax regulations can be complex and vary from country to country. Seeking advice from a qualified tax professional with experience in handling cryptocurrency taxes can help you navigate the complexities and ensure compliance with tax laws.
Not Reporting All Cryptocurrency Transactions
Not reporting all cryptocurrency transactions is a significant mistake that many individuals make when it comes to crypto taxes. This mistake often stems from the misconception that cryptocurrency transactions are anonymous and go unnoticed by tax authorities. However, governments around the world are becoming increasingly vigilant about enforcing tax compliance in the cryptocurrency space.
Here are some potential consequences of not reporting all cryptocurrency transactions:
- Penalties and Fines: If tax authorities discover unreported crypto transactions, they may impose penalties and fines, which can be quite substantial depending on the extent of non-compliance.
- Interest Charges: In addition to penalties, tax authorities may also charge interest on the outstanding tax amount from the date it was due.
- Tax Evasion Charges: Deliberate non-reporting of cryptocurrency transactions can be considered tax evasion, which is a serious offence. Tax evasion can lead to criminal charges, significant fines, and even imprisonment in some cases.
- Loss of Credibility: Failure to comply with tax regulations can damage your credibility with tax authorities, which may lead to more extensive audits and scrutiny in the future.
To avoid these consequences, it’s crucial to report all your cryptocurrency transactions accurately and transparently. Keep detailed records of your trades, purchases, sales, and any other crypto-related activities. Many countries now require taxpayers to report their cryptocurrency transactions on their tax returns explicitly.
Not Understanding the Tax Laws
Not understanding the tax laws related to cryptocurrencies is a prevalent mistake that can have serious consequences for individuals. Cryptocurrency taxation can be complex and can vary from country to country. Failing to comprehend the tax laws can lead to several issues, including:
- Underreporting or Overreporting Taxes: If you don’t understand the specific rules and guidelines for cryptocurrency taxation, you may end up underreporting or overreporting your taxable income. Underreporting could result in penalties and interest charges, while over reporting may lead to paying more taxes than necessary.
- Missing out on Tax Deductions and Credits: Not understanding the tax laws could cause you to overlook potential deductions or credits related to cryptocurrency transactions. This can lead to paying more taxes than you are obligated to pay.
- Incurring Additional Taxes and Penalties: Certain activities in the cryptocurrency space, such as staking, airdrops, or mining, may have tax implications that you might not be aware of. Failure to account for these activities could result in unexpected taxes and penalties.
- Violating Tax Regulations Inadvertently: Ignorance of tax laws is not a valid defence if you unintentionally violate the rules. Tax authorities expect individuals to be aware of the tax obligations related to their financial activities, including cryptocurrency transactions.
- Increased Audit Risk: If your tax returns contain errors or inconsistencies due to a lack of understanding of cryptocurrency tax laws, you may face a higher risk of being audited by tax authorities.
To avoid these issues, take the following steps:
- Educate yourself: Take the time to learn about the tax laws and regulations relevant to cryptocurrency transactions in your country. Resources from tax authorities and reputable financial websites can be valuable sources of information.
- Seek Professional Advice: Consider consulting a qualified tax professional with expertise in cryptocurrency taxation. They can guide you through the complexities and ensure compliance with tax laws while optimising your tax situation.
- Keep Meticulous Records: Accurate record-keeping is crucial for cryptocurrency transactions. Keep track of all buys, sells, trades, and any other crypto-related activities, along with relevant dates, amounts, and cost basis.
- Stay Updated: Cryptocurrency tax laws are subject to change and may evolve over time. Stay informed about any updates or changes that may affect your tax obligations.
Not Using a Reputable Tax Software
Not using reputable tax software when dealing with cryptocurrency taxes is another common mistake that individuals make. While some may attempt to handle their tax reporting manually, utilising reputable tax software specifically designed for cryptocurrencies can offer numerous benefits and help avoid potential pitfalls. Here are some reasons why using reputable tax software is essential:
- Accuracy: Cryptocurrency transactions can be complex, involving multiple trades, conversions, and transfers across various platforms. Reputable tax software is designed to handle these complexities and can accurately calculate your gains, losses, and tax liabilities based on the data you input.
- Time-saving: Manual calculation of cryptocurrency taxes can be time-consuming and prone to errors. Tax software automates the process, saving you time and effort in preparing your tax returns.
- Comprehensive Reporting: Reputable tax software typically generates comprehensive tax reports and forms that are compliant with tax regulations. This can help ensure that you meet all reporting requirements and avoid potential penalties due to incomplete or incorrect reporting.
- Integration with Exchanges and Wallets: Some tax software can directly integrate with popular cryptocurrency exchanges and wallets. This feature simplifies the process of importing transaction data, reducing the chances of missing any crucial information.
- Real-time Tax Calculations: With live market data and real-time tax calculations, tax software can provide you with up-to-date information on your tax liability as you make transactions throughout the year.
- Support for Various Jurisdictions: Cryptocurrency tax laws can differ significantly from one country to another. Reputable tax software often supports multiple jurisdictions, allowing you to accurately calculate taxes regardless of where you reside.
- Security and Privacy: Reputable tax software prioritises security and employs encryption measures to protect your sensitive financial information.
Not Considering the Tax Implications of Mining and Staking
You are absolutely right; not considering the tax implications of mining and staking cryptocurrencies is a common mistake that can lead to tax issues and potential penalties. Both mining and staking can create taxable events, and it’s essential to understand how they affect your tax obligations. Here’s a brief overview of the tax implications of mining and staking:
- Mining: Mining involves using computational power to validate transactions and add them to the blockchain. Miners are rewarded with newly minted coins and transaction fees. In most jurisdictions, mining rewards are considered taxable income at the time they are received. The fair market value of the mined coins at the time of receipt is used to calculate the taxable income.
Additionally, if you incur expenses related to mining (such as equipment costs, electricity, or maintenance), you may be eligible for deductions or credits. Keep detailed records of your mining income and expenses to accurately report them on your tax return.
- Staking: Staking involves holding and ‘staking’ a cryptocurrency to support the network’s operations and secure the blockchain. In return, stakers receive rewards in the form of additional coins or tokens. Staking rewards are generally treated as income and are taxable at the time they are received.
The tax treatment of staking may vary depending on whether the rewards are received immediately or are subject to lock-up periods. If the rewards are subject to vesting or lock-up, the taxable event may be postponed until they become freely tradable.
As with mining, you should keep detailed records of your staking rewards and any associated expenses to ensure accurate reporting on your tax return.
It’s important to note that tax laws related to mining and staking can be complex and may vary from country to country. Some jurisdictions may have specific guidelines or tax rates for these activities. To avoid potential tax issues, consider the following steps:
- Educate yourself: Take the time to understand the tax laws related to mining and staking in your country. Consult official tax authorities’ guidelines or seek advice from a qualified tax professional with experience in cryptocurrency taxation.
- Keep detailed records: Maintain thorough and accurate records of your mining and staking activities, including rewards received, associated expenses, dates, and fair market values.
- Use reputable tax software: Consider using reputable tax software that supports mining and staking calculations and helps you accurately report your cryptocurrency-related income and expenses.
- Seek professional advice: If you have complex mining or staking activities or are unsure about the tax implications, consult with a tax professional to ensure compliance with tax laws and optimise your tax strategy.
Conclusion
Seeking advice from a tax expert at Vakilsearch is highly recommended before implementing any of the things mentioned in the blog. Also, don’t forget to remember that saving tax on cryptocurrency can be very beneficial for you if you take this action while consulting with any of the experts with expertise in this field. The experts at Vakilsearch are most aware of all your questions and the solutions you want on cryptocurrency.
Crypto Tax FAQs
How much Taxes do you Owe on Crypto?
The amount you spend or swap, your income level, tax bracket, and how long you've owned the cryptocurrency you spent will all affect how much tax you owe on it.
How can Cryptocurrency Taxes be avoided?
Other than not using your cryptocurrency, there are no legal methods for avoiding paying taxes on it. If the value of your cryptocurrency increases, you will ultimately have to pay taxes when either selling it, using it, changing it to money, swapping it, or trading it.
Does Cryptocurrency Taxes Apply If you don't Sell them?
Taxes are only due on cryptocurrency when a gain is realized, which can only happen when you trade, use, or trade it. The possession of a cryptocurrency is not taxed.
How can I avoid tax on crypto?
Avoiding tax on cryptocurrency is not advisable, as it can lead to legal consequences and penalties. However, you can take steps to minimize your tax liability legally. Keep accurate records of your crypto transactions, including purchases, sales, and exchanges. Consider holding cryptocurrencies for more than one year to qualify for long-term capital gains tax rates, which are often lower than short-term rates. Consult with a tax professional to understand tax laws in your jurisdiction and explore tax-saving strategies compliant with the law.
How do you avoid TDS in crypto?
Tax Deducted at Source (TDS) is not typically applicable to cryptocurrency transactions. TDS is generally withheld by a payer on certain types of income, such as salaries, interests, or dividends. However, in the context of cryptocurrencies, TDS does not apply to regular trading, investing, or transfers. If you receive crypto as payment for services rendered, TDS may be applicable based on the nature of the transaction and relevant tax laws in your country.
Can we save tax on cryptocurrency in India?
In India, taxes on cryptocurrency are subject to the Income Tax Act. While avoiding tax is not recommended, you can implement tax-saving strategies. For example, if you hold cryptocurrencies for more than two years, you may qualify for the long-term capital gains tax, which is taxed at a lower rate. Additionally, you can claim deductions for allowable expenses related to cryptocurrency transactions. It's crucial to comply with Indian tax regulations and consult a tax professional for personalized advice.
How to pay tax on cryptocurrency in India?
In India, taxes on cryptocurrency gains are subject to the capital gains tax. The tax rate depends on whether the gains are short-term or long-term, which is determined by the holding period. Short-term capital gains tax is calculated based on your income tax slab rate, and long-term capital gains tax is currently at 20% with indexation benefits. To pay taxes on cryptocurrency gains, you need to report your income from crypto transactions in your income tax return and pay the applicable tax amount. Consult a tax professional or refer to the Income Tax Act for detailed information on cryptocurrency tax rates and payment procedures in India.
Are there any tax benefits for investing in cryptocurrency in India?
Currently, there are no specific tax benefits for investing in cryptocurrency in India. However, the cost of acquisition of the cryptocurrency can be deducted when calculating the taxable income from its sale.
Is it legal to use cryptocurrency in India?
While the Indian government hasn't declared cryptocurrency illegal, it has not yet provided a legal framework for its use. It's recommended to stay updated on any regulatory changes in this evolving space.
How to report cryptocurrency on tax return?
Since crypto transactions are subject to income tax, you need to report them in your tax return. This includes details like the type of crypto asset, date of acquisition and sale, sale price, and cost of acquisition.
How to calculate taxes on cryptocurrency?
The income from transferring crypto assets is taxed at a flat rate of 30% without any deductions except the cost of acquisition. You can use a crypto tax calculator available online or consult a tax professional for assistance.
How do you calculate 30% tax on crypto?
Here's how to calculate the 30% tax on your crypto gains:
- Calculate your capital gain: Subtract the cost of acquisition (purchase price) from the selling price of the cryptocurrency.
- Multiply the capital gain by 30%: This will give you the base tax amount.
- Add any applicable surcharges and cess: The current cess is 4% on the tax amount.
