Investing in cryptocurrencies? Know the tax implications


The back-to-back lockdowns have made people realise the importance of having a passive income source and in search of that, Indians have tried different things to generate good money. Some have started their own business from home and some have started investing in IPOs and real estate. However, a lot of people choose to invest in cryptocurrencies. As per a report, over ten million crypto investors have been added in India in 2021.

It seems hesitation about crypto culture is receding at a steady pace in India. People are finding great opportunities with great returns on investment (ROI ). However, despite the humongous growth in the number of crypto currency traders and investors, people are worried on the taxation front and the future of the asset in India. Let’s talk about the tax implications on cryptocurrency in India. We would like to inform you that all the provided details are for knowledge purposes only.

Taxability of Cryptocurrency

The Reserve (RBI) has not yet granted Bitcoin or any other cryptocurrency the status of legal tender in India. Hence, there are no clear rules or guidelines defining taxability for cryptocurrencies, which calls for specific clarification from the Income Tax (I-T) department.

However, it is not a good idea to skip paying taxes on profits from the sale of cryptocurrencies. All income except the explicitly exempted income is liable to levy of income tax. This means that investors will be liable to pay taxes on cryptocurrency investments.

Nature of investment

In regular income tax parlance, the taxation on cryptocurrencies should depend on the nature of investment — whether it is held in the form of currency or in the form of assets.

Profits from the sale of cryptocurrency can be taxed as business income if traded frequently, or as capital gains if held for investment purposes. However, one must note that, If considered as business income, then the profit can be taxed as per the applicable slab rate; but if it is held for investment purpose, then taxation can be the same as tax gain in the form of capital gains.

It also means that, if taxpayers used their investments within three years, then short-term capital gains according to the relevant tax slabs will be applicable. However, if the redemption happens post 3 years, then it can be treated as long-term capital gain and can be taxed at 20% with indexation.

Meanwhile, some experts believe that profits from cryptocurrencies can be treated as income from other sources. We can also consider profits from frequent trading as income from speculative business income. However, more details and discussion will be required to understand it better.

What about mining?
Cryptocurrency generated by mining is a self-generated capital asset and can be taxed as capital gain but Section 55 of the I-T Act 1961, which deals with the cost of acquisition and improvement, does not recognise it.

However, as per some online sources, Cryptocurrency mining can be considered as a taxable event. The fair market value or cost basis of the coin is the price at the time the miner mined it.

It needs to be noted that you can avail a business deduction for the equipment and resources used in mining. The nature of those deductions varies depending on whether you mined the cryptocurrency for personal gains. If you are running a mining business, you can avail deductions to cut your tax bill. But you cannot avail these deductions if you have mined cryptocurrencies for personal gain.

Disclosure of income from cryptocurrencies
It is a well-known fact that taxpayers having income over ?50 lakh yearly are required to disclose their assets and liabilities in the Schedule to Assets and Liabilities along with cost of acquisition. Since cryptocurrencies can also be considered as assets, taxpayers also have to include cryptocurrencies in the above schedule.

Additionally, taxpayers who are resident and ordinary residents also have to disclose foreign income and assets on their tax filing or tax returns.

If we also consider the tax and penal consequences under the Act and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, it may be a good step for taxpayers to disclose cryptocurrency holdings in the foreign assets or Income Schedule.

In taxability of cryptocurrency in India, there are no official announcements or guidelines till now about the adoption of cryptocurrency and tax imposition on it. Thus, we have to wait for government guidelines to know more details about taxation on cryptocurrency.

(The author, Amit Gupta, is MD of SAG Infotech. The views are his own)

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