Important🚨: The CRYPTO community had many questions about the advance tax. The advance tax season is also here, and the last date to file advance taxes is March 15, 2023.

In this post, you will get to know everything about advance tax.

What is Advance Tax?

Advance tax means income tax should be paid in advance instead of a lump sum at year's end. It is also known as "pay as you earn tax." These payments have to be made in installments as per the due dates provided by the income tax department.

Who should pay advance tax?

1) Traders, freelancers, and businesses: If your total tax liability is Rs 10,000 or more in a financial year, you have to pay advance tax. The advance tax applies to all taxpayers. Senior citizens, who are 60 years of age or older and do not run a business, are exempt from paying advance tax.

2) Presumptive income for businesses The taxpayers who have opted for the presumptive taxation scheme under Section 44AD have to pay the whole amount of their advance tax in one instalment on or before March 15. They also have the option of paying all of their tax dues by March 31.

3) Presumptive income for professionals Independent professionals such as doctors, lawyers, architects, etc. come under the presumptive scheme under Section 44ADA. They have to pay the whole of their advance tax liability in one instalment on or before March 15. They can also pay the entire amount by March 31.

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The rise of virtual digital assets (VDA) like Bitcoin, Ethereum, and NFTs has introduced a new method of gifting. But, the taxation of these digital gifts can be a complex maze as they could be taxable. Let us help you unravel the complexities of the Indian tax system and help you gift and receive cryptocurrencies and tokens with ease.

In the previous Budget 2022, the finance minister outlined the rules for taxing these types of assets, including provisions for taxing gifts of cryptocurrency, NFTs, and other virtual digital assets.

But when you talk about gifting or transferring certain assets to another person or account, are they taxable by nature?

Let’s explore the horizons of crypto taxation on crypto gifting.

What is considered a crypto gift?

Crypto gifts refer to the act of transferring cryptocurrency from one individual to another as a present, with no anticipation of receiving anything of equal value in return.

According to the Income Tax regulations, generic gifts can be categorized as follows:

Monetary gifts: Any money received as a gift.

Movable property gifts: Specified movable assets received as a gift, or received at a lower price (less than its market value).

Immovable property gifts: Real estate received as a gift without any consideration, or acquired at a reduced price.

How is crypto gifted?

If you’re interested in gifting cryptocurrency, there are a few different ways to do it. You can use gift cards from a cryptocurrency exchange, a crypto paper wallet, or even a crypto token.

Gift Cards: If you’re a crypto trader or investor, you can simply buy a gift card from the cryptocurrency exchange and give it to someone.

Crypto Paper Wallet: Another option is a crypto paper wallet, which is essentially a piece of paper with a private key and bitcoin address. This is a unique way to gift cryptocurrency.

Crypto Tokens: Lastly, you can also gift a crypto token, which is a virtual currency token or a specific amount of cryptocurrency.

Tax Implications for Receiving a Crypto Gift Transfer

Gifts with a value of up to INR 50,000 are tax-exempt.

Gifts from relatives with a value exceeding INR 50,000 are tax-exempt.

Gifts from non-relatives with a value exceeding INR 50,000 are taxable.

VDA gifts received on special occasions, through inheritance or a will, or in contemplation of death are exempt from tax.

 

Let’s take a look at this example: 

For example, if you are given Rs. 20,000 in crypto tokens by your friend as a gift, you will not have to pay any taxes on it at that time. However, if a few months later, you receive another gift of Rs. 35,000 as tokens from another friend, and then closer to Diwali, another gift of Rs. 5,000 from another friend, the total gifts received (Rs. 60,000), which exceeds the Rs. 50,000 limits. This amount will be subject to taxation.

Tax Implications for the Giver of a Crypto Gift

According to Section 2(14) of the Income Tax Act, virtual digital assets, including cryptocurrencies, NFTs, and other virtual assets, are classified as Capital Assets. 

Normally, when you sell a Capital Asset, you have to pay taxes on it. But the law says that gifts are not considered a sale. So, if you give someone a cryptocurrency or an NFT as a gift, you don’t have to pay taxes on it.

Taxation of Employer-Given Gifts

Taxable Benefit: Any taxable benefit given by an employer, such as gifts during festive seasons, will be considered taxable income for the recipient.

Performance Bonuses: Gifts received as awards or on special occasions, such as performance bonuses, are also taxed.

But, there is good news too – You or a family member can receive gifts in cash or kind from the employer with a tax exemption of up to Rs 5,000.

Tax on the Sale of a Crypto Gift

The sale of a crypto gift is not taxed in the hands of the giver.

Income Clubbing: If the recipient of the gift is a spouse or minor child, any income generated from the asset is clubbed with the income of the giver.

Calculation of Tax Liability on Gifted Crypto

The holding period of the gifted crypto is calculated from the date of purchase by the previous owner to the date of sale by the recipient.

Importance of considering purchase date, purchase value, sale date, and sale value to calculate tax liability.

The tax rate on the sale of cryptocurrency: A 30% tax rate is implied without claiming deductions for the cost of improvement, or transfer expenses.

Key points to consider for calculating the tax on gifted cryptocurrency

Holding Period – Calculate the length of time the virtual digital asset (VDA) has been held from the date of purchase by the previous owner (i.e. the giver of the gift) to the date of sale by the receiver.

Purchase Date – The date of purchase by the previous owner (i.e. the giver of the gift).

Purchase Value – The cost of the purchase by the previous owner (i.e. the giver of the gift).

Sale Date – The date of sale by the receiver of the gift.

Sale Value – The amount received from the sale by the receiver of the gift.

Tax Liability – The tax rate on the sale of cryptocurrency is 30% without deductions for the cost of improvement, or transfer expenses.

Conclusion

As the world of cryptocurrency continues to evolve and expand, so too does the complexity of its taxation.

However, tax doesn’t always have to be difficult.

Say farewell to crypto tax headaches because KoinX simplifies your tax compliances for you. You can skip all the technicalities and calculations of crypto taxes yourself and let KoinX take care of it.

Crypto assets have been more of a disappointment than a revolution for many users, and global bodies like the IMF and the Financial Stability Board urge tighter regulation.

Some of the rapidly evolving technology behind crypto, however, may ultimately hold greater promise. The private sector keeps innovating and customizing financial services.

But the public sector too should leverage technology to upgrade its payment infrastructure and ensure interoperability, safety, and efficiency in digital finance, as we noted in a recent working paper: A Multi-Currency Exchange and Contracting Platform. Others too are advancing similar views.

Technology has jumped ahead

New payment technologies include tokenization, encryption, and programmability:

Tokenization means representing property rights to an asset, such as money, on an electronic ledger—a database held by all market participants, optimized to be widely accessible, synchronized, easily updatable, and tamper-proof. Anonymity of token balances and transactions is not required (and in fact undermines financial integrity).

Encryption helps decouple compliance checks from transactions so only authorized parties access sensitive information. This facilitates transparency while promoting trust.

Programmability allows financial contracts to be more easily written and automatically executed, such as with “smart contracts,” without relying on a trusted third party.

Private-sector innovation

With these new tools in hand, the private sector is innovating in ways that may be more transformative than the initial wave of crypto assets: tokenization of financial assets, tokenization of money, and automation.

The tokenization of stocks, bonds, and other assets may cut trading costs, integrate markets, and enlarge access. But paying for such assets will require money on a compatible ledger. One example is stablecoins, are one example to the extent they comply with regulation. More importantly, banks are testing tokenized checking accounts. And automation is widespread, allowing third parties to program functionality much as developers build smartphone apps.

While the private sector pushes the boundaries of innovation and customization, it will not ensure that transactions are safe, efficient, and interoperable, even if well regulated. Rather, the private sector is likely to create client-only networks for trading assets and making payments. Open ledgers may emerge in an attempt to bridge private networks, but are likely to lack standardization and sufficient investment given limited profit potential. And using private forms of money to settle transactions would put counterparties at risk.

Central bank role

Central bank digital currencies can help because of their dual nature as both a monetary instrument—a store of value and means of payment—but also as infrastructure essential to clear and settle transactions. Policy discussions have mostly focused on the first aspect, but we believe the second should receive just as much attention.

As a monetary instrument, CBDC provides safety; it alleviates counterparty risks and provides liquidity in payments. But as infrastructure, CBDC could bring interoperability and efficiency among private networks for digital money and even assets.

Payments could be made from one private money to another, through the CBDC ledger or platform. Money could be escrowed on the CBDC platform, then released when certain conditions are met, such as when a tokenized asset is received. And the CBDC platform could offer a basic programming language to ensure smart contracts are trusted and compatible with one another. That too will become a public good in tomorrow’s digital world.

Cross-border payments

The same vision applies to cross-border payments, although governance gets more complicated (an important topic we leave for another time).

A public platform could allow banks and other regulated financial institutions to trade digital representations of domestic central bank reserves across borders, as suggested in our working paper.

Participants could trade safe central bank reserves without being formally regulated by each central bank, nor requiring major changes to national payment systems.

Again, transactions require more than the movement of funds. Risk-sharing, currency exchange, liquidity management—all are part of the package.

Thanks to the single ledger and programmability, currencies could be exchanged simultaneously, so one party does not bear the risk of the other walking away. More generally, risk-sharing contracts can be written, auctions can support thinly traded currency markets, and limits on capital flows (which exist in many countries) can be automated.

Importantly, the platform would minimize risks inherent in such contracts. It would ensure that contracts be fully backed with escrowed money, automatically executed to avoid failed trades, and consistent with one another. For instance, a contract to receive a payment tomorrow could be pledged as collateral today, lowering costs of idle funds.

Beyond the transfer of value, encryption can help manage the transfer of information. For instance, the platform could check that participants comply with anti-money laundering requirements, but allow them to bid anonymously on the platform for, say, foreign exchange, while still seeing the aggregate balance between bids and asks.

Technology can thus support key public policy objectives:

Interoperability among national currencies;

Safety thanks to escrowed central bank reserves, settlement finality, and automatic contract execution;

Efficiency from low transaction costs, open participation, contract consistency, and transparency.

Much remains to be explored, and this vision is still taking shape. Crypto was fueled by an attempt to circumvent intermediaries and public oversight. Ironically, its real value may come from the technology that the public sector can leverage to upgrade payments and financial infrastructure for the public good—to inject interoperability, safety, and efficiency into private sector innovation and customization.

Unlock the hidden treasures of tax on airdrops in India - with our expert guide, you'll discover the legalities surrounding airdrop income and how to properly report it.

CONTENTS

So what are airdrops?

How to calculate your crypto airdrop income?

Applicable Tax clause on Crypto Airdrops

Real-life scenario(s) of tax computation on crypto airdrops

Some Ambiguities about Tax on Airdrops

Ways to reduce tax on crypto airdrops

Calculating Crypto Taxes with KoinX

The world of crypto airdrops is exciting. Not only is it a great way to earn extra income but it also accounts for a good stock up of your digital assets for your portfolio.  

While that’s a suitable addition to your existing income, do you know that the Indian Financial Budget 2022 also categorized the income derived from airdrops under virtual digital assets?

So are you liable to pay taxes on these free tokens?

YES!

But don’t let the legalities surrounding airdrops leave you feeling dropped. Our in-depth guide will take you on a journey through the nuances of tax on airdrops in India, from understanding the tax implications to reporting your airdrop income accurately. 

Sit back and relax while we guide you through this uncharted territory and help you stay on the right side of the law.

So what are airdrops?

Let’s say a blockchain project or a new crypto token is about to be released.

Each of these projects runs a marketing campaign that gives away free tokens or coins to a certain group of people – typically to increase awareness and adoption of the project. 

These airdrops could happen for multiple reasons including incentivizing people holding certain coins, rewarding community members, or distributing tokens to a new user base.

Participating in an airdrop requires you to hold a certain coin, and sign up for a certain service or action, typically including your involvement in promotional activities.

How to calculate your crypto airdrop income?

Airdrops are taxed as Income from other sources only if they have value – as on the date of receipt and are traded on exchanges or DEXes.

For example, If you received 100 XYZ tokens on Feb 06, 2023. The value of 1 XYZ token is Rs. 10. The taxable Income further is Rs.1000.

Crypto airdrops are considered gifts for tax purposes and could also be eligible for tax exemption. Check out our tax guide on Gifts.

Applicable Tax clause on Crypto Airdrops

Crypto airdrops are subject to income tax as per the union budget 2022 in India. 

Your crypto airdrop income is taxed at applicable slab rates. This applies to a tax when you spend, sell, or swap your coins or tokens that you received from the airdrop (if there’s a profit).

The cost basis for the airdrops depends on the market value on the day you received these tokens/coins in INR.

Real-life scenario(s) of tax computation on crypto airdrops

Example 1 – Let’s say a person named Ravi receives 10,000 ABC tokens as Airdrop on April 01, 2022. There is no trading of ABC tokens either on exchanges or DEXs. This means, there’s no income from airdrops.

Example 2 – Now let’s assume a person named Riya receives 10,000 ABC tokens as Airdrop on April 01, 2022, too and there’s an involvement in the trading (exchanging, buying or selling) of ABC tokens on exchanges or Dexes. The ABC token is quoting a price of ₹10 on April 01, 2022. This means that Riya will have an income of ₹1,00,000 from airdrops at the time of receipt of airdrops. 

In the second example, if there’s a subsequent sale of the tokens, the amount of ₹1,00,000 is considered as a cost of computing gains.

In case if Riya sells the tokens on June 01, 2022, when the price for the ABC token was ₹20, the taxable gains will be: 

10,000 ABC tokens * (₹20 – ₹10) = ₹1,00,000 taxed at 30% this amount ( ₹1,00,000/- ) will be considered as a cost for computing gains on the subsequent sale of the tokens. 

Some Ambiguities about Tax on Airdrops

There are a few areas that can be unclear when it comes to taxes on cryptocurrency airdrops:

The fair market value of airdropped tokens: There may be confusion over how to determine the fair market value of airdropped tokens, as their value may be highly volatile and may not be listed on major exchanges. 

The timing of taxation: It is unclear when airdropped tokens should be considered taxable, as they may be received at different times and may not be immediately tradable. 

Ways to reduce tax on crypto airdrops

Timely claims – While certain airdrops are directly deposited into your wallet, others may need to be claimed. The ones you can claim open a chance for you to create tax planning opportunities. So, until you don’t claim the airdrop, there’s no taxable income to be declared.