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Trading in crypto? Here's how your profits will be taxed in India

While there is some doubt regarding the taxability of crypto-currencies, it will probably be taxed under the heads of income from other sources or under speculative transactions since it is not considered as a currency.

June 07, 2021 / 03:01 PM IST
Bitcoin 2021 heralded the receding of the pandemic, with comfortingly familiar and mundane elements of a business conference: the branded plastic sunglasses, brightly colored sponsor booths, lanyards and panels. Some attendees wore business casual. Others looked ready for a music festival. One donned a furry rave bikini.

Bitcoin 2021 heralded the receding of the pandemic, with comfortingly familiar and mundane elements of a business conference: the branded plastic sunglasses, brightly colored sponsor booths, lanyards and panels. Some attendees wore business casual. Others looked ready for a music festival. One donned a furry rave bikini.

The Indian cryptocurrency market currently has around 7-8 million active crypto-investors, who hold more than $1 billion in investments collectively, as per unofficial estimates. And even though there might be regulatory ambiguity in India about this at present, nothing is as certain in this world as death and taxes. Your profits from trading in crypto are subject to taxation as well. So, if you’re a trader, read on to know how your income and profits from cryptocurrency trading will be taxed.

In the ambit of Income Tax Act

In response to a question posed on March 23 in Rajya Sabha, MoS for Finance Anurag Singh Thakur elaborated regarding the taxability status, stating that as per Section 5 of Income Tax Act 1961, the total income will constitute all earnings of an individual, irrespective of the source it is derived from and its legal status. This means that earnings from cryptocurrency-related activities will be included in your taxable income. In fact, any business activity that pertains to cryptocurrencies or assets, unless specifically exempted, is taxable under Goods and Service Tax. 

The government, however, also notified that it does not maintain any formal database regarding the cryptocurrency earnings of Indians at present. Even the Income Tax Act has not been amended to include cryptocurrencies within the definition of capital assets, as per Ludhiana-based CA Anuriti Goyal. “There is still some doubt regarding the taxability of crypto-currencies, but it will be taxable for sure. It will probably be taxed under the heads of income from other sources or under speculative transactions since it is not considered as a currency,” she continued.

How will cryptocurrency earnings be taxed?Analysts picture four scenarios in which crypto assets can be taxed in India. Let's take a closer look at each of them:1. Mining BitcoinsIn order to acquire bitcoins, miners are required to solve equations that have a 64-digit hexadecimal solution, known as a hash. This rakes up immensely vast energy and electricity consumption, making it an extremely expensive process. Consider this. A 2021 report by Cambridge Centre for Alternative Finance estimates the following annual electricity consumptions for various economies. 
Country/NetworkAnnual Electricity Consumption (TWh)
China 6,543
Global Bitcoin Network129
Norway124
Bangladesh70
While China accounts for around 65 percent of bitcoin mining activities that take place around the world, India does not feature in the list of top 10 countries that engage in bitcoin mining. Since the bitcoins generated will be self-generated assets, there is uncertainty as to how they will be taxed, whether the provisions of capital gains will apply, or if it will be categorised under the head of income from other sources.2. Bitcoins as investmentsDepending on the holding duration of these assets, they would be subject to taxation under long-term capital gains (20 percent post indexation) or short-term capital gains (taxed as per individual slab rate).

But if they are not considered as capital assets and are instead, taxed under income from other sources, then their tax rate will be equivalent to the taxation slab the person falls under. 

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3. Bitcoins held as stock-in-trade

As the government notification mentioned, trading in bitcoins would result in the generation of business income, which is taxable as per the tax slab category the concerned individual falls into. 

4. Bitcoins as consideration

In such a case, its treatment will be similar to receiving money, i.e. it will be income in the hands of the recipient, taxed depending on the profits it generates from business or profession. 

However, on many occasions, the government has mentioned that it does not recognise cryptocurrency as legal tender, and thus, it will not be equated to fiat currency like rupee. 

With India accounting for almost 10 percent of global bitcoin trading, tax regulation is imminent. With the RBI and other government bodies maintaining a neutral stance on this, it remains to be seen how this digital, convention-defying asset class will fit in the Indian tax system. 
Ira Puranik
first published: Jun 7, 2021 03:01 pm

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