To be fair and straightforward, you can’t avoid crypto taxes in India. Not only that, there is very little you can do to reduce your tax burden as well. That being said, the internet is swarming with tax-saving strategies for Indian crypto investors and traders, alongside a mix of myths and misconceptions.
But are these strategies legitimate? And more importantly, are they legal?
Just recently, WazirX, a popular Indian crypto exchange, found itself embroiled in a tax evasion scandal, resulting in office raids.
That is why in this guide, we’ll aim to take an in-depth look at how crypto taxes work in India, potential strategies to avoid taxes and if they are legal, and debunk some common myths.
Basics of Crypto Taxes in India
Until the 2022 budget, the Indian government and the Income Tax Department didn’t have an official stance on cryptocurrencies and other digital assets.
However, things changed when the Finance ministers of India introduced Section 2(47A) into the Income Tax Act, bringing virtual digital assets (VDAs) like crypto and NFTs under the tax purview and establishing a framework for their taxation.
Presently, any capital gains made from selling, spending, or swapping crypto are subject to a fixed 30% tax rate, regardless of whether the income is business income or investment income or whether it falls under short-term or long-term gains. It’s worth noting that Indian taxpayers may also be liable for a surcharge and a 4% cess.
In addition to the regular tax rate, Indian crypto investors and traders also face a 1% Tax Deducted at Source (TDS) on the sale or transfer of crypto assets exceeding ₹10,000 or ₹50,000 in a single financial year.
This TDS requirement poses a real challenge to accounting for crypto transactions, particularly for active traders. We have discussed this in-depth in our complete guide to crypto taxes in India.
Apart from capital gains and TDS, earning crypto income in interest or rewards, such as staking rewards or mining rewards, is taxed at the individual’s applicable income tax rate.
Unfortunately, unlike in other countries, Indian taxpayers cannot claim losses and use them to offset gains. Moreover, when it comes to deductions for crypto taxes in India, there are no deductions available apart from the acquisition cost.
Now that we know the basics, let’s look at some plausible methods to avoid crypto taxes in India and if they actually work.
Using Decentralized and P2P Platforms
There has been ongoing debate and speculation about the plausibility of using decentralized and peer-to-peer (P2P) platforms to avoid crypto taxes in India.
But does this theory hold any water?
First and foremost, even if you engage in transactions on decentralized platforms, at some point, you will need to convert your crypto to fiat currency (Indian Rupees), as crypto is not considered legal tender in India, and most businesses, stores, and merchants do not accept crypto as a form of payment.
Although there are a few exceptions, such as HighKart, an e-commerce site, and UnoCoin, a crypto exchange, allows users to use their crypto to purchase gift vouchers from popular brands and stores, along with others.
Therefore, when you eventually DO convert your crypto to fiat currency, you will be subject to the fixed 30% tax rate. So, no matter what platform or method you use, the tax obligations for converting crypto to fiat currency remain intact.
However, some people argue that you can utilize decentralized exchanges and wallets to buy and hold cryptocurrencies while using P2P platforms to trade and sell crypto assets.
How does it work?
P2P platforms facilitate direct transactions between individuals without the involvement of a centralized exchange or authority.
So, buyers can transfer fiat currency through bank transfers, and sellers can send crypto using decentralized wallets, making it difficult for authorities to connect the amount received in a bank account to a specific crypto transaction.
While technically speaking, the income received in your bank account through these P2P transactions may still be subject to income tax, realistically, smaller, less substantial amounts may go under the radar.
Nevertheless, it’s essential to understand that doing this is still ILLEGAL, as it goes against the tax regulations laid out by the Indian government.
Indirect Exposure to Bitcoin
Indirect exposure to Bitcoin is another way to potentially avoid crypto taxes in India, but it comes with its own challenges and limitations.
But what does indirect exposure to Bitcoin mean?
Basically, it means putting your money into Bitcoin-related products, such as exchange-traded funds (ETFs) or stocks of companies operating within the crypto space, like crypto exchanges. However, this doesn’t mean you can completely escape taxes. While you might dodge the fixed 30% tax rate, any gains from these investments will still be subject to the appropriate income tax rates.
As of now, there are no Bitcoin ETFs available to invest. Although investors can open foreign accounts with US brokerage platforms to purchase Bitcoin ETFs, keep in mind that investing in an ETF doesn’t mean you actually own Bitcoin. Instead, you’re riding the waves of Bitcoin’s price movements through investment vehicles.
This approach of investing in Bitcoin ETFs or stocks of companies dealing with crypto may not be suitable for you if your goal is to have direct ownership of Bitcoin and other cryptocurrencies.
Changing Tax Residency
Some people, mostly micro crypto influencers, are advocating changing tax residency to crypto tax havens, like Dubai or Singapore.
But is it really worth it?
Tax residency refers to whether a person is considered a resident, for tax purposes, in a particular country. The tax laws and regulations of that specific country then govern how their income, including crypto-related income, is taxed.
Changing your tax residency to a more crypto-friendly country may seem like an enticing idea, but isn’t practical for most people.
Changing tax residency solely for the purpose of avoiding crypto taxes in India may make more sense for high-net-worth individuals who are heavily involved or dependent on crypto as their primary source of income. For the average crypto investor or trader, completely uprooting their tax residency may not be a feasible solution, as it involves various complexities, including legal requirements, financial implications, and personal and emotional factors.
Additionally, tax authorities are becoming increasingly vigilant and implementing measures to prevent tax evasion and abuse of residency rules. Simply changing tax residency without valid reasons beyond avoiding taxes may raise red flags and attract unwanted attention from tax authorities.
Misinformation Around Avoiding Crypto Taxes in India
Misinformation surrounding crypto tax avoidance in India is prevalent, even among reputable sources. Most of it stems from the wrong application of tax-saving strategies intended for other countries, like the United States and Canada, to the context of India. That is why it’s crucial to understand India-specific tax laws, as what may hold true for one nation might not necessarily apply to another.
Other than that, always seek professional help when in doubt. By doing so, you receive accurate and up-to-date information and a better understanding of your tax obligations as a crypto investor or trader in India.
In the following sections, we will debunk some prevailing misconceptions and myths about avoiding crypto taxes in India.
Trading on Crypto Exchanges Based Outside of India
If you understand the concept of tax residency and global taxation, you would know that no matter which country a particular crypto exchange belongs to, as an Indian citizen, you’ll always be obligated to pay taxes on your gains to the Indian authorities.
So, even if you use a crypto exchange based outside of India, the income or capital gain you incur will still be subject to the fixed 30% tax rate and 1% TDS. Not paying these taxes is essentially a form of tax evasion, which never ends well and generally results in hefty fines and penalties, or sometimes, legal troubles.
In some countries, donating crypto is tax-deductible, meaning you can deduct the donation amount from your total tax liability. However, as we established in the beginning, the Indian government allows no deductions, including deductions on charitable contributions.
So, while this strategy may work well in other countries, it’s pretty much useless in India.
Crypto Tax-Loss Harvesting
Crypto tax loss harvesting is a smart strategy where you intentionally sell your crypto assets at a loss to balance out your gains and lower your overall tax bill. It’s a popular and effective approach in countries that allow taxpayers to claim their losses.
However, in India, where deductions for crypto losses are not allowed, this strategy doesn’t apply.
Holding Crypto to Pay Less Taxes on Long-Term Gains
Once again, this approach would only work in countries with varying tax rates for long-term and short-term gains, which is not the case with India. In India, crypto tax rates on long-term and short-term gains are essentially the same – 30%.
Reducing your Taxable Income or Selling Crypto in a Low-Income Year
Reducing your taxable income or selling crypto in a low-income year may seem like a smart move to lower your tax burden. The logic is simple: if your overall taxable income is lower, you’ll potentially fall into a lower tax bracket, resulting in lower capital gains tax rates, right?
Well, not quite in India. Unlike other countries, where crypto tax rates vary based on income brackets, India applies a fixed 30% tax rate on crypto gains, irrespective of your tax bracket or total taxable income.
Can you Avoid Crypto Taxes in India?
So, now that we’ve addressed all the plausible ways to avoid crypto taxes in India and debunked some common myths around it, the question remains: can you avoid crypto taxes in India?
The answer is NO.
The Indian crypto tax laws not only make it difficult to entirely avoid taxes but also severely limit the possibility of reducing them to any significant extent.
While this may be disheartening for crypto investors and traders in India for now, this may change in the near future. As the crypto landscape continues to evolve and governments worldwide adapt to this digital revolution, there is hope for positive changes in the Indian tax framework.
In the meantime, it’s crucial to comply with Indian crypto tax laws and regulations and ensure proper reporting and taxation of your crypto transactions. And when in doubt, always seek professional help from crypto tax experts to get tailored guidance based on your unique situation.
Implications of Avoiding Crypto Taxes in India
While it may be tempting to try out some of the strategies to avoid crypto taxes in India, understand that most of them are still a form of tax evasion, which is against the law. In India, tax authorities take this very seriously and impose hefty penalties for attempting to evade taxes.
The repercussions can range from monetary fines to interest charges on unpaid taxes and even criminal prosecution in severe cases. To steer clear of these issues, prioritize compliance and transparency when reporting and paying your crypto taxes.
By fulfilling your tax obligations diligently and reporting your crypto activities accurately, you can safeguard yourself from legal troubles and maintain a positive relationship with the authorities. Remember, the goal is not to evade taxes but to navigate the tax landscape responsibly.