A Beginner's Guide To Investing In Bitcoin In India

Bitcoin is a digital currency that allows users to buy goods and services and exchange money without involving banks, credit card issuers, or other third parties. In India, despite the Reserve Bank's warning against the use of virtual currencies, the popularity of Bitcoin is increasing, with a domestic Bitcoin exchange reporting over 2,500 new users daily. If you're interested in investing in Bitcoin in India, here's a step-by-step guide to help you get started:

Register and verify your account on a crypto exchange

To register and verify your account on a crypto exchange, follow these steps:

Step 1: Choose a Reputable Crypto Exchange

Select a cryptocurrency exchange that operates in India, such as WazirX, CoinDCX, ZebPay, Unocoin, Mudrex, or Crypto.com. These platforms offer user-friendly interfaces, robust security measures, and support for a wide range of cryptocurrencies.

Step 2: Sign Up and Create an Account

Visit the website of your chosen crypto exchange and locate the sign-up or registration button, usually found in the upper right corner. Provide the necessary information, such as your email address, date of birth, and country of residence. Some exchanges may also require additional personal details during this step.

Step 3: Verify Your Email Address

Check your email inbox for a confirmation email from the crypto exchange. Click on the confirmation link or enter the one-time password (OTP) sent to your email to verify your email address.

Step 4: Set Up Account Security

Many crypto exchanges offer security options such as two-factor authentication or SMS-based OTPs. It is highly recommended to enable these security features to protect your account.

Step 5: Complete KYC Verification

Know Your Customer (KYC) verification is typically required by crypto exchanges to comply with regulatory requirements. Submit the necessary documents, such as your government-issued ID card, Aadhaar Card, and PAN card. This step ensures the security of your transactions and investments.

Step 6: Verify Your Phone Number

Provide your phone number and select your country's area code. You will receive an SMS verification code, which you should enter on the exchange website or app.

Once you have completed these steps, your account on the crypto exchange should be fully registered and verified. Remember to review the specific instructions and requirements of your chosen crypto exchange, as the process may vary slightly between platforms.

Add funds to your wallet

Before you can add funds to your Bitcoin wallet, you need to ensure you have a wallet in the first place. There are many different types of Bitcoin wallets, so it's important to do your research. Some are online (hot wallets, desktop wallets, or mobile wallet apps), while others are offline (e.g. hardware wallets). You can also spread your Bitcoin across several wallets.

Once you have your wallet, you can add funds by buying Bitcoin on a cryptocurrency exchange and transferring it to your wallet. Most exchanges allow you to fund your account through bank transfers, net banking, mobile payment apps, cryptocurrency wallets, or UPI.

If you're in India, you can use platforms like Mudrex, CoinDCX, CoinSwitch, or WazirX to buy Bitcoin. These platforms are registered with the Financial Intelligence Unit India and offer a range of cryptocurrencies to invest in.

When you're ready to buy, simply place an order on the exchange, fund your account, and input your wallet address to receive the Bitcoin. It's important to note that you cannot add fiat currency (like USD or Euros) directly to your crypto wallet. You'll need to link your credit card or bank account to the exchange and then transfer the Bitcoin to your wallet.

Keep in mind that different exchanges and payment methods may have varying transaction fees, so be sure to consider those when making your purchase.

After you've made your purchase, you'll want to securely store your Bitcoin in your chosen wallet. Always be cautious when making transactions and carefully follow the steps provided by your wallet platform to ensure your Bitcoin arrives safely.

Place your Bitcoin order

Once you have chosen a crypto exchange, such as Binance, and have registered and verified your account, you can place your Bitcoin order.

Placing your Bitcoin order:

• Choose how you want to buy the Bitcoin asset. You can buy Bitcoin with a debit or credit card, or with Google Pay or Apple Pay.
• Navigate to the "Buy Bitcoin with USD" page on Binance.
• Select Bitcoin and USD from the dropdown menu.
• Choose your payment method and press "Confirm".
• On the payment confirmation page, verify the details and confirm the order within the time limit. You can use the 'Refresh' button for a new quote.
• Click "Confirm" to place your order.
• You will be redirected to your bank's transaction page. Follow the instructions to verify the payment.
• Once verified, the coin will appear in your Spot Wallet.

Things to keep in mind:

• You have 1 minute to confirm your order at the current price. After 1 minute, your order will be recalculated based on the current market price.
• You can click "Refresh" to see the new order amount.
• You can store your Bitcoin in your personal crypto wallet or simply hold it in your Binance account.
• You can also trade Bitcoin for other cryptocurrencies or stake it on Binance Earn for passive income.
• If you would like to trade your Bitcoin on a decentralised exchange, you may want to check out Trust Wallet, which supports millions of assets and blockchains.

Select a secure storage option

After buying your Bitcoin, it is crucial to store it securely. Most exchanges offer custodial wallets, but you may want to consider transferring your Bitcoin to a non-custodial wallet for enhanced security. Non-custodial wallets give you full control over your funds and have minimal risk of being hacked because no personal information is stored in databases. They are available in both hardware and software options.

Custodial wallets are managed by third parties, such as exchanges, which store your private keys and guarantee their safety. However, they have been the target of many attacks.

When choosing a storage option, it is important to understand the pros and cons of each approach. Here are some options to consider:

• Third-Party Custodian: Entrusting a third-party custodian with your Bitcoin is similar to holding your cash in a bank. The custodian holds and manages your funds according to your instructions. Many also offer other functions, such as trading, staking, and exchanging Bitcoin for fiat currencies. Third-party solutions are best suited to individual investors who do not want the sole responsibility of safeguarding their assets and seek bank-level protection.
• Self-Storage: This option is popular among individuals who want full control over their cryptocurrency. Within self-custody, there are three main types of crypto wallets: software wallets, hardware wallets, and paper wallets. Software wallets are web-based, desktop, or mobile crypto wallets. While convenient, they are generally considered insecure due to their continuous connection to the internet. Hardware wallets are offline devices similar to USB drives, which are the most secure but least convenient type of wallet. Paper wallets are created using a public and private key pair printed on paper and are technically unhackable, but they can be easily misplaced or stolen.
• Hybrid Solutions: There are also an increasing number of partial custody solutions that combine the benefits of third-party and self-storage custody. These offer self-managed wallets with some level of third-party assistance and institutional controls or protections.

When choosing a storage option, consider the following:

• Safety and Security: Ensure your chosen storage option has robust safety measures such as two-factor authentication, cold storage, fund insurance, and data encryption.
• User Interface (UI): Choose a storage option with a simple, intuitive UI to enhance your investing experience.
• Fees and Charges: Familiarize yourself with the fee structure, including trading fees, deposit and withdrawal fees, and any other charges, as these can eat into your profits.
• FIU Compliance: Ensure the platform adheres to regulations specified by the Financial Intelligence Unit (FIU), including Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures.

Examples of Secure Storage Options

• CoinDCX: This platform offers self-custody wallets, allowing users to transfer cryptocurrencies to their own custody with one click. It also provides strong safety measures, with 95% of funds stored in cold storage and two-factor authentication.
• Mudrex: This platform offers excellent security features, including storing users' funds in cold wallets with two-factor authentication. It also has a user-friendly interface and strong customer support.
• Ledger Nano X or Trezor Model T: These are commercial non-custodial cold wallets, usually USB connection-type drives that connect to your device. They are safer than storing your keys in a wallet on your connected device.

Understand the tax implications

As of 2022, cryptocurrency profits are taxable in India. The Indian government clarified its official stance on cryptocurrencies and other virtual digital assets (VDAs) in the 2022 budget. Here are the key points to be aware of:

• Income from the transfer of VDAs, such as cryptocurrencies and NFTs, is taxed at a rate of 30%.
• No deductions are allowed when reporting income from the transfer of VDAs, except for the cost of acquisition.
• Losses from VDAs cannot be set off against any other income.
• Gifting or receiving VDAs as gifts will attract tax in the hands of the receiver.
• A 1% Tax Deducted at Source (TDS) is applicable on all sell transactions of VDAs, including cryptocurrencies and NFTs, if the transactions exceed ₹50,000 (or ₹10,000 in some cases) in the same financial year.
• The crypto tax applies to all investors, whether private or commercial, who transfer VDAs during the year.
• The tax rate is the same for short-term and long-term gains, and it applies to all types of income earned by the investor.
• Therefore, the gains from trading, selling, or swapping cryptocurrencies will be taxed at a flat rate of 30% (plus a 4% surcharge), irrespective of whether the income is treated as capital gains or business income.
• In addition to this tax, a 1% TDS will also apply on the sale of crypto assets of more than ₹50,000 (or ₹10,000 in certain cases).
• Crypto gains must be reported in the Income Tax Return (ITR) under Schedule VDA.
• For the financial year 2023-24 and assessment year 2024-25, you will need to declare your cryptocurrency taxes using either the ITR-2 form (if reporting as capital gains) or the ITR-3 form (if reporting as business income).
• The tax on cryptocurrency profits is calculated as follows: Profit from cryptocurrency = Sale price - Purchase price (acquisition cost)
• Crypto accounting software is recommended for managing and compiling transactions across multiple wallets and exchanges.
• Tax Deducted at Source (TDS) aims to tax crypto traders and investors when they complete a transaction. The buyer is responsible for deducting the TDS amount and forwarding it to the government, and the seller will receive the remaining amount.
• In the case of peer-to-peer (P2P) transactions, the buyer is responsible for deducting TDS and filing the appropriate form.
• Crypto-to-crypto transactions: TDS will be applicable to both the buyer and the seller at a rate of 1%.
• Losses incurred in crypto cannot be offset against any income, including gains from cryptocurrency.
• Disclosure of gains and losses in virtual currencies in the notes to the accounts of company financial statements is now mandatory, per the Ministry of Corporate Affairs (MCA).

Frequently asked questions