How income tax rule applies on your cryptocurrency gains?

The future of cryptocurrency in India is quite blurry. Whether it will get the status of a legal tender or not remains a long-standing question. However, income from such investments does count for legal taxation in India. Lack of clarity on virtual currencies like bitcoin cannot be cited as the reason to avoid paying income tax on such investments.

As per the Income Tax Act 1961, every income except the explicitly exempted one is liable for taxation in India. Income from investment in cryptocurrency is no different and people are often advised to identify the nature of these investments (depend on nature of holding i.e., whether the same is held as a capital asset or trading stock) and pay tax accordingly.

The Income Tax Act does not separately recognize the concept of cryptocurrencies and hence there is no earmarked taxation framework or regime that governs such transactions.

“However, the extant statutory provisions contained in the income tax law with respect to the scope of total income and taxability based on the residential status of the taxpayer should continue to apply on investments related to bitcoins, etc.” Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP said.

Profits from the sale of cryptocurrencies can either be taxed as business income if traded frequently or as capital gains if held for investment purposes. Income from cryptocurrency held as stock-in-trade would be classified as ‘business income’. On the flip side, if it is held as an investment, such gains would be subject to capital gains tax.

“Determining the nature of a particular investment in cryptocurrency is a fact-specific exercise and no universal principles can be adopted. However, the Central Board of Direct Taxes, the nodal income tax policy agency, had in the context of investments in shares and securities, issued instructions that culled out certain guiding principles like the volume of purchases and sales, frequency of trades, objective or intention of making investments, manner of maintenance of books of accounts, etc., to assist taxpayers and the Revenue Authorities in distinguishing whether shares are held by an assessee as investment or stock-in-trade,” Jhunjhunwala asserted.

While no standalone principle is decisive, these could be collectively applied in the context of cryptocurrencies as well.

The rate of capital gains tax depends on the period of holding of cryptocurrency and the same is classified as a capital asset. A capital asset, except shares of a company or units of a specified mutual fund, held for a period of more than 36 months is be considered as a long-term capital asset (LTCG), and gains derived from such asset would be subject to taxation at a concessional rate of 20% plus applicable surcharge and cess, with the benefit of indexation (inflation adjustment).

“On the contrary, cryptocurrency held for 36 months or less than 36 months would be considered as a short-term capital asset. Short term capital gains are subject to tax at normal tax rates applicable to the taxpayer, depending on the income tax slab,” Jhunjhunwala clarified.

Meanwhile, many tax experts consider profits from cryptocurrency as income from other sources and tax it as per the income tax slab that can be up to 30%.

Traders of cryptocurrency report their trading profits under the head ‘Profit or gains from Business or Profession’ in the prescribed ITR form. Of course, unless clarified otherwise, the risk of such trading gains being considered as speculative gains also exists along with other anti-abuse provisions under Sections 69, 69A and 69C dealing with unexplained investments, money, and expenditure.

“Individuals having business income are required to report total income in Form ITR 3 whereas the prescribed form for companies is ITR 6. In addition, disclosures in ITR include details of stock, net profit, foreign assets, and foreign income (where applicable). Penalty for under-reporting and misreporting of income under Section 270A of the IT Act is definitely an important area to watch out for while taking technical positions on the taxability of income arising from cryptocurrencies,” Sandeep highlighted.

Taxpayers dealing in cryptocurrency should also be watchful of other levies that may be applicable in the chain of transactions involved in the cryptocurrency ecosystem including the applicability of equalisation levy, GST and TDS/ TCS on the transaction in goods and on payments to bitcoin miners and operators etc.

It has also been reported that a 2% levy might be applicable on crypto-assets bought online by Indians from overseas exchanges. The equalisation levy is also known as the ‘Google Tax’ was originally limited to foreign technology companies conducting business in India but not paying their taxes since the company headquarters weren’t local.