• Notification Date: 13-07-2023
• Notification No: N/A

Calculation of Income Tax on Crypto Gains like Airdrops, Mining, Staking

The Union finance minister made gains from crypto trading taxable at 30 per cent in Budget 2022. This means that you need to pay tax on crypto gains effective from April 1, 2022. However, unlike other asset classes, calculating crypto gains is complicated, particularly considering various transactions like staking, mining, airdrops, trading, transfer, etc.   

Experts say while you get a transactions file from exchanges to calculate taxes, taxpayers must keep a few things in mind. “Cryptos are mostly decentralised and hence there are challenges on how to determine the cost basis, categorise numerous transactions into trading, transfer, staking, airdrops etc and post all these you calculate fair market value of a particular transaction. Example: if you have staked ETH2, you would first need to know at what price did you buy ETH at? At what price did transfer from ETH to ETH2 happen? What is the staked ETH2 you have received in your wallet? And what was the price of the ETH2 when it hit your wallet,” said Avinash Polepally, Senior Director-Crypto Business Head, Cleartax. 

Then each use case must be filed with the right ITR form. Example, ITR2 in case of capital gains or ITR3 in case of business income. “Right form selection to file taxes based on various crypto use cases you have like trading, airdrops etc should be filed as capital gains. Mining is best filed as business income and staking based on the tax calculation could either be filed as capital gains or business income. This not only helps in saving taxes but also helps you file taxes correctly which could be useful later in case the tax regulations change,” said  Polepally. 

For instance, the cost of acquisition for the Airdrops earnings will be considered as ‘Zero’ for computing the gains at the time of receipt and further the price at the time of receipt will be considered as cost price to calculate gains at the time of sale by the holder. 

Importantly, it is important to note that certain crypto assets are declared correctly so that the government does not send you tax notice. Eg: transfer between different wallets, gifts upto 50K etc is non-taxable. 

How is cost price of crypto determined? Cost price of crypto is very challenging to determine. Mostly crypto cost price doesn’t work like Indian stock markets as exchanges like NSE / BSE have a clear orderbook system through which all brokers are connected. Polepally explains, “In case of crypto centralised exchanges like Binance, Coinbase, Coinswitch, CoinDCX all work independently and hence each has very different volume and liquidity levels of trading pair. So, when you buy BTC from Binance it could be at a very different price from what the price is in Coinswitch at that exact timestamp. So, you would need some software that connects with all these exchanges to get the right cost price since the time a coin was purchased. This could be 5yrs price data with some exchange and 10yrs trade data with some other exchange.” 

He added, “Secondly for any decentralised transactions you would have to parse the blockchain and determine the dollar value of the transaction. This is very tedious to do manually you would be better of using a software platform that is connected to blockchains to determine the same. 

Polepally explains it is not possible for any exchange to directly provide capital gains statement due to many reasons given below:  

In case of crypto most exchanges like Binance where you can’t purchase crypto directly from INR, people would have transferred crypto from different exchange wallets. This makes it impossible for Binance to determine the cost basis for the transferred asset. 

Most exchanges do also not keep track of the fair market value of a transaction. For example, if you traded ETH to BTC on Binance, Binance does not know whether the value of the trade on that timestamp was Rs 1 lakh or Rs 1.2 lakh. This makes it impossible for most exchanges to calculate any capital gains.