Tax on Cryptocurrency Investment in India
“Cryptocurrency” word is formed by using two different words; “Crypto” which means ‘encryption or coding of data’ and “Currency” which means ‘medium of exchange like ordinary money’. So, from this description you can easily understand that cryptocurrency is a kind of money that exists in the virtual or digital world which uses encryption to enable the security of transactions. In other words, cryptocurrency is type or digital money that serves the purpose of ordinary money like dollars, pounds, rupees, etc. but does not have a physical form like banknotes or coins. Cryptocurrency is a new form of digital money.
Bitcoins, Ethereum, Ripple, Dogecoin are few known cryptocurrencies. India has more cryptocurrency holders than any other country, i.e., more than 100 million. Yes, in India, more than 10 crore people own cryptocurrencies.
Cryptocurrency is not a legal tender in India, but if you want to buy a certain crypto like Bitcoin, Dogecoin, etc. you can trade in it. India does not have regulatory proceedings to govern cryptocurrency till now. But, if you have invested in any type of digital currency and if you have received profits from such type of investment then you have to show it in income tax returns.
How can you invest in cryptocurrency?
There are two methods to own cryptocurrencies.
1 Cryptocurrency Mining: Crypto mining is a process of solving baffling mathematical equations to authorize crypto transaction. Some people think crypto mining is creating a new coin altogether, but it is not right. Instead, it is a process of releasing a cryptocurrency from the total supply. It means mining a cryptocurrency already circulating in the market.
2 Buying: You can buy cryptocurrency from currency exchange by giving real money and store in online crypto currency wallet in digital form.
The RBI has banned banks and other financial institution for facilitating cryptocurrency transaction in 2018. But in 2020, supreme court allowed trading of virtual coins. Though cryptocurrency is not legal tender in India, the government has made it mandatory for companies dealing with cryptocurrencies to disclose profit or loss gained or lost in transaction of cryptocurrencies. Companies have to show amount of cryptocurrencies held in balance sheet.
Government is considering proposal of the Cryptocurrency and Regulation of Official Digital Currency Bill. This bill will contain income tax returns for holding cryptocurrency in India and in foreign crypto exchanges for residents of India.
There is no tax provision for crypto currency right now but many experts have speculated many possibilities in which cryptocurrency transaction can be taxed.
Classification of Cryptocurrency
In UK, USA cryptocurrencies are held as capital asset. Cryptocurrency is considered as capital asset if you have bought for investment purpose. And, income on investment of cryptocurrency is taxed as long term capital gain if kept for more than 36 months and short term capital gain if kept less than 36 months.
Read also: Taxation and Tax Saving Options in India
How is cryptocurrency taxed?
As written above, there are two possible ways in which you can own cryptocurrencies.
When cryptocurrency is mined, it means its self created capital asset. So, when you sale such asset, it would generate capital gain. The cost incurred to acquire cryptocurrency can not be determined as it is self created asset.
“Furthermore, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets. Therefore, the capital gains computation mechanism fails following the Supreme Court decision in the case of B.C.Srinivasa Shetty. Hence, no capital gains tax would arise on the mining of bitcoins. This position would hold till such time the government thinks of coming up with an amendment to Section 55 of the Act.”, according to Cleartax.in
Cryptocurrencies are considered as capital asset and if you keep cryptocurrencies as an investment and transferred in exchange for real money then the profit gained would be long term capital gain or short term capital gain depending upon the period of holding the cryptocurrencies. Any gains after holding a cryptocurrency for 36 months or more would be taxable as long-term capital gains and gains received during a shorter period would be taxable as short-term capital gains.
Long term gains would be taxed at a flat rate of 20% while short term gains would be taxed at the individual slab rate. The cost of acquisition for arriving at long term capital gains will be determined after giving the benefit of indexation.
But Income Tax Authorities may not consider Bitcoins as a capital asset and hence the provisions of capital gains would not apply. IT authorities may choose to tax the gains from bitcoins under the head “Income from other sources” and so the you would have to pay taxes according to the tax slab you fall under. But these are assumptions. Everyone is waiting for the winter session of the Indian Parliament, when the country’s first cryptocurrency legislation is likely to be presented.
Gain from cryptocurrency trading would be considered as “business income” and taxed as per individual slab rate. As cryptocurrency regulations in India are not clear many Indians are buying and selling cryptocurrencies on foreign platforms, which may have better features and customer service. The Indian government may levy the 18% Goods and Services Tax on transactions on foreign cryptocurrency exchanges. India has also reportedly considered a 2% equalisation levy on transactions with foreign crypto exchanges. For Indian cryptocurrency exchanges, the 18% GST is charged as the trading fee to customers, which is similar to the setup for stock brokerages.
While dealing with cryptocurrency, you should know that you have to pay taxes if you generate income out of it. So, maintain records of all transactions. Till now, cryptocurrency regulation, taxation of cryptocurrency is not clear in India. But, government may propose bill to pass regulations on it in coming winter season.
Getting into crypto is not easy but Indian crypto exchanges like WazirX and CoinSwtich created a platform where Indian people can buy or sell crypto with security. WazirX is a popular cryptocurrency exchange app that can be used to trade cryptocurrencies in India.