Cryptocurrency Taxation in the U.S. and in India

The Internal Revenue Service (IRS) initiated taxation for cryptocurrencies in 2014. The Indian Government initiated the same, in 2022. Both nations believe that investors/traders should pay taxes on this virtual source of income. However, they have different ideas regarding the treatment of cryptocurrencies and their taxation. The differences are outlined below. Apart from this, you can also check how Bitcoin prevents double-spending.

Cryptocurrency taxation in the US and India
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Definition of Crypto Assets

  • USA

The IRS considers digital currencies as capital assets. Therefore, whenever an investor declares his/her crypto profits, he/she must pay income tax. Of course, it also depends upon whether the concerned assets are short-term or long-term.

If the investor sells the digital assets within the year of purchase, they are short-term capital assets. Sales after the year of purchase come under the category of long-term capital assets. These assets are eligible for lowered tax rates.

  • India

During the presentation of the Union Budget, the Finance Ministry defined crypto assets as being akin to virtual digital assets.

The authorities do not award these virtual digital assets the same treatment as they do other assets. Therefore, crypto assets come under the category of income tax. Whatever profits an investor may gain from undertaking crypto dealings or transactions, he/she must pay 30% tax upon them.

However, the Government does not permit the adjustment of deduction from the concerned asset’s sale price. Only the cost of acquisition is to be included.

As crypto-assets do not get the label of capital assets, investors have no access to long-term-held-assets indexation benefits. They must confront 30% taxation, regardless of the duration of holding their assets.

Rules Regarding Crypto Losses

  • USA

The investor is welcome to claim the losses arising from his/her crypto dealings and set them off against other sources of income. Similarly, in case it is not possible to adjust a loss, the investor may carry it forward. It is possible to set it off against gains that may appear in the future.

  • India

The Indian Income Tax Act permits the adjustment of losses against the sale/gain of capital assets. These losses arise from the sales of capital assets. However, the adjustment must be in alignment with certain conditions.

If the investor fails to profit from the sales of his/her virtual digital assets, he/she may not set off the losses against other sources of income. According to the Indian Government, the profits/losses from virtual digital assets are akin to the gains/losses from lottery winnings, gambling, or horse racing.

Gifting and Taxation

  • USA

There is no need to withhold tax when there is a payment of consideration for a certain asset.

The same rule applies when someone receives digital currencies as a gift. The recipient has no need to repeat the details on the tax returns form, or pay taxes. However, if the recipient plans to sell the gift in the future, then, he/she becomes eligible for capital gains taxation. Regarding the sender, if the value of the gift crosses a particular limit, then he/she must report the transaction and pay tax for it.

  • India

If the value of a virtual digital asset’s sale crosses a particular limit, the buyer is eligible for a 1% TDS (tax deducted at source) deduction. The person responsible for the payment of consideration, must deduct and deposit this amount. This action must be undertaken prior to the transfer of funds.

The snag is that the purchaser may not have complete details about the seller if the communication occurs through a cryptocurrency exchange. Therefore, there is ambiguity regarding compliance with this regulation.

A gift is taxable if the value (fair market) crosses the threshold. The beneficiary will have to pay the tax since movable assets also come under the category of virtual digital assets.

However, crypto-assets exchanged amongst relatives, are not liable for taxation. Even special-occasion gifts are not taxable.

DeFi or Other Use Cases and Taxation

  • USA

The IRS states that earning crypto assets via mining, promotional offer, or payment for services/goods, is ‘income’. Therefore, it is taxable. The day of the transaction is important. The complete fair market value of the concerned cryptocurrency is equally important. Finally, the investor will have to adhere to the regular income tax rate.

  • India

There is no taxation on lending, borrowing, donations, staking, wallet transfers, gaming, mining, forks, P2P transfers, airdrops, etc.

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