How crypto taxation platforms can help Indian investors navigate new rules

With the popularity of cryptocurrencies rising in India, it is important to file taxes for crypto assets.

In July 2022, the Indian government announced a 30% tax on cryptocurrency profits and 1% TDS (Tax Deducted at Source) on selling crypto assets. While the sector welcomed the move hoping for broader regulation, the confusion over the fine print resulted in a 70% slump in trade volumes in compliant Indian exchanges as investors shifted to global exchanges.

Moreover, the union government brought crypto assets under the provisions of PMLA (Prevention of Money Laundering Act) in March, making KYC requirements and enhanced due diligence mandatory.

The new regulations have created a greater need for crypto taxation platforms to look at simplifying the tax computation process and ensuring accurate reporting of gains and losses. Some of the critical features that these taxation platforms are using to achieve this goal include:

Comprehensive tax computation

Specialised platforms accurately calculate tax liabilities associated with crypto transactions, considering factors that make it different from traditional income tax calculations. It includes various tax-related services, including assistance with income tax return filing and ensuring comprehensive tax assistance beyond crypto-related transactions.

Unlike traditional income tax calculations, crypto taxation involves a unique set of factors that require specialised knowledge and tools to ensure accurate reporting and compliance.

For instance, cryptocurrency transactions can trigger various taxable events, including buying, selling, trading, mining, staking, receiving rewards, airdrops, and even using crypto for purchases. These may have different tax implications, such as capital gains or losses, mining income, or rewards.

Also, while the Indian tax platforms take all these changes into account while computing tax liabilities, it is essential for people investing in global exchanges to share their records correctly as their investments can be fully governed by Indian laws.

Keeping it simple

Cryptocurrency transactions are typically recorded on decentralized ledgers like blockchain, making tracking and maintaining accurate records challenging. Specialised platforms can integrate with multiple exchanges and wallets, automatically import transaction data, and organise it in a format that aligns with crucial tax reporting requirements.

Cost basis calculation

Computing the cost basis of cryptocurrencies is a tough ask, with variables such as multiple purchases at fluctuating prices, transaction fees, and using different wallets or exchanges.

The tax platforms can handle these calculations automatically using methods such as Weighted Average Formula, First-in-First-Out (FIFO), Last-in-First-Out (LIFO), or specific identification. Valuing crypto transactions by the FIFO method aligns with the long-term investment perspective prevalent in the Indian stock market.

This long-term perspective is often favoured by investors seeking sustained growth and capital appreciation. Presently, most tax portals use methods other than FIFO to compute the profits; this is not to the investor's advantage as alternative valuation methods lack consistency and transparency.

The platforms offer various features to simplify tax computations, including support for unlimited transaction volumes, account merging, withdrawal and deposit matching, automatic duplicate data handling, hardware wallets, instant report generation, and integration across exchanges, wallets and blockchains.

Some also specialise in error reconciliation for users' crypto holdings within exchanges and between different sources such as chains, wallets, and exchanges.

Pricing tiers and more

Crypto taxation platforms position themselves across different pricing tiers. Serious users and traders who allocate their crypto investments across exchanges and self-custodian wallets rely on crypto taxation platforms to calculate their tax liability based on government regulation.

These platforms help streamline the process and ensure accurate computation of taxes owed. Taxation platforms allow users to sync their data and merge accounts using their existing email IDs. They simplify the process for users with investments across multiple platforms.

One crucial aspect of accurate tax calculation is the automatic deposit and withdrawal matching between exchanges. Crypto taxation platforms systematically analyse these transactions, matching deposits and withdrawals to calculate the tax liability more efficiently.

Automating this process ensures that taxes are calculated accurately, reducing potential errors and minimising tax burden.

Businesses engaging in significant trading activities, typically trading above Rs 10 crore, follow a different taxation procedure to ensure compliance with tax regulations, however, the procedures will only be applicable if the business is involved in crypto derivative trading.

If anomalies are identified, the platforms can improve the tax computation by recalculating the profit and loss (PNL) statement.

Some crypto exchanges offer a personal relationship manager assigned to each user filing their Income Tax Return (ITR). Additionally, a qualified Chartered Accountant (CA) assists the user until the filing process is complete. This approach enables users to choose appropriate tax-saving methods within the framework of the law.

Some platforms also support NFT tax calculations, allowing users to calculate and report their obligations related to NFT transactions accurately.

In conclusion, as the Indian cryptocurrency market matures and regulations become more stringent, the need for reliable crypto taxation platforms has become crucial. By leveraging these features, Indian investors can ensure tax compliance, streamline their investment planning, and navigate the complexities of crypto taxation.