Einstein has aptly observed that income tax is the hardest thing to understand. With the influx of new crypto investors coming into the market and the lack of regulations formed or announced by the government, there is much curiosity amongst people on how Cryptocurrency will be taxed. There is an absence of official data on the number of crypto investors in India. However, one of the think tanks, IndiaTech, has estimated the number of investors to be 10 million holding around $1.5 billion in digital assets.
The Indian Income Tax Act does not make cryptocurrencies taxable. However, it is necessary to report the Cryptocurrency in income tax returns and pay the tax incurred. Tax authorities around the world have been working to make rules of taxation for cryptocurrencies. There is a high chance that the tax regulations of cryptocurrencies in India will mirror the international standards. There are various possibilities as to how the taxation rules would appear.
Cryptocurrency could be considered as either an asset, a commodity, currency or a good. Moreover, there might be a creation of an all-encompassing law that includes regulation for all the uses of Cryptocurrency. Cryptocurrency can be taxed in the following ways:
Profits obtained as capital gains can be taxed according to rules provided under the Income Tax Act, 1961. The Act states that the capital gains would be subject to taxation under long-term capital gains (20 % post indexation) or short-term capital gains (taxed as per individual slab rate). In the USA, crypto is considered an Asset.
For example, if taxable income exceeds Rs 10 lakh, one would be liable to a tax @ 30% against the flat rate of tax of 20%. In addition, one would be taxed as long-term capital gains. The benefit of indexation would be available if the asset is taxed as capital gains.
Being a self-generated asset, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961. Section 55 defines the cost of acquisition of mined bitcoin as non-taxable. However, if the same bitcoin is used to generate income, it is taxable under the Income Tax Act, 1961.
For purchasing Cryptocurrency, one has to pay GST under the Goods and Services Act, 2017. Goods are defined as things that are bought against money. Cryptocurrency perfectly fits in the definition of an immovable good but the only contradiction is that there can be no exchange between goods, unlike in Cryptocurrency.
In India, Bitcoins are held as stock-in-trade being transferred in exchange for real currency. The profit booked out of crypto trading would give rise to income which would be subject to tax as per the individual slab rates. Singapore and the UK consider it as currency and have tax laws for the same.
The bitcoin transactions are gradually increasing in India, however, laws regulating them are significantly absent. We hope that the government will soon come up with a notification to dispel the ambiguity around bitcoins' legality, taxability and the disclosure requirement of bitcoins.
Pankaj Mathpal, Founder & MD at Optima Money Managers said, “Cryptocurrency is not a legal tender in India, but it doesn't mean cryptocurrency transactions are illegal.” So, while filing income tax on profit from cryptocurrency investments, one has two options — either prove that your income from Cryptocurrency is a business or an asset class income or choose the safest mode of income from other sources.
Tax on Cryptocurrency in India - Frequently Asked Questions (FAQ)
1.How is long term capital gain differentiated from the short term capital gain for cryptocurrencies in India?
An individual who owns any asset for less than 3 years since the date of transfer/ownership is referred to as a short term capital asset. This duration should be less than 12 months in case of shares. If they are held for more than that, they are subject to long term capital gains.
2.How will the government take tax on cryptocurrency?
The Government collects taxes through three means: a) voluntary payment by taxpayers into various designated Banks. For example, Advance Tax and Self Assessment Tax paid by the taxpayers, b) Taxes deducted at source [TDS] from the income of the receiver, and c) Taxes collected at source [TCS]. It is the constitutional obligation of every person earning income to compute his income and pay taxes correctly.
4. Where can we I help for cryptocurrency tax-related queries?
A. Tax professionals or the Public Relations Officer [PRO] in the local office of the Income-tax Department can provide the necessary help. One can also take assistance from Tax Return Preparers [TRPs]. The nearest TRP can be located at www.trpscheme.com