Are Crypto Assets Subject to Gift Tax in India?

With the growing popularity of cryptocurrencies like Bitcoin, Ethereum, and other digital assets, it's important to understand how Indian tax laws treat these assets when they are given as gifts. While traditional assets such as cash and property are well-defined in terms of tax liability, the taxation of crypto assets is relatively newer and less clearly defined. However, cryptocurrencies are still subject to tax, and gifts of such assets have specific rules under Indian tax laws.

Tax Implications for Gifting Crypto Assets in India:

Gift Tax and Section 56(2) of the Income Tax Act:

Section 56(2) of the Income Tax Act applies to gifts of movable property, and cryptocurrency is considered movable property. According to this section, if the value of the gift exceeds Rs. 50,000, it is taxable in the hands of the recipient if the gift is received from a non-relative (someone other than a family member).

If you give cryptocurrency (such as Bitcoin, Ethereum, etc.) as a gift to a non-relative, and the total value of the gift exceeds Rs. 50,000, the recipient will be required to pay tax on the value of the crypto assets as income under income from other sources.

Exemption for Gifts to Relatives:

Gifts made to relatives (as defined under the Income Tax Act) are exempt from tax, including gifts of crypto assets. Relatives, in this context, include spouses, parents, siblings, and children.

Therefore, if you gift cryptocurrency to a relative, there is no tax applicable, even if the gift exceeds Rs. 50,000. However, it’s important to keep documentation to show that the gift was made to a relative.

Tax on Capital Gains:

The recipient of the crypto assets will be subject to capital gains tax when they sell or transfer the gifted crypto assets in the future.

Short-term capital gains (if crypto is sold within 36 months of acquisition) or long-term capital gains (if held for more than 36 months) will apply based on the holding period and the asset's market value.

Gifted assets retain the holding period of the donor for the purpose of calculating capital gains. This means if the donor held the cryptocurrency for more than 36 months, the recipient will also be eligible for long-term capital gains tax treatment when they sell the asset.

Documentation for Crypto Gift:

While gifting crypto assets, it is advisable to keep proper records to demonstrate the transfer of the asset. A gift deed (though not mandatory) can be useful to avoid any legal issues in case of disputes.

It's also essential to maintain digital proof of the transaction, such as blockchain transaction records or crypto wallet transaction history, to demonstrate the transfer of the asset.

Taxation of Crypto Gift Received by Minors:

Gifts of cryptocurrency to minor children are not directly taxable, but the income generated from the gift (such as interest or capital gains) will be taxed in the hands of the parents under Section 64(1A) if the total income exceeds the exemption limit of Rs. 2.5 lakh.

Example:

Example 1: Crypto Gift to a Non-Relative

An individual gifts Bitcoin worth Rs. 1 lakh to a friend (a non-relative). Since the value exceeds Rs. 50,000, the friend must report the gift in their income tax return and pay tax on the value of the gift as income from other sources.

The capital gains tax will apply when the friend decides to sell the Bitcoin, and the holding period for calculating capital gains will be based on the donor's holding period.

Example 2: Crypto Gift to a Relative

A person gifts Ethereum worth Rs. 75,000 to their child (a relative). Since the gift is made to a relative, there will be no gift tax applicable, and the gift is tax-exempt.

However, if the child later sells the Ethereum, capital gains tax will apply based on the holding period.

Example 3: Crypto Gift to Minor

A parent gifts Bitcoin worth Rs. 2 lakh to their minor child. The gift itself is not taxable, but any income or capital gains generated from the Bitcoin when sold will be taxed in the parent's name.

Conclusion:

In India, cryptocurrency gifts are subject to the same rules as other movable property under Section 56(2) of the Income Tax Act. Gifts of crypto assets to non-relatives exceeding Rs. 50,000 are taxable as income in the hands of the recipient. However, gifts to relatives are exempt from tax, and capital gains tax will apply when the recipient decides to sell the crypto assets. As cryptocurrencies are digital, it is important to maintain proper documentation and transaction records for both the gift and any subsequent capital gains.