Cryptocurrency regulations are all set to be passed in the upcoming winter session of the Parliament. But those who traded in them and made profits face an important question: how will the gains be taxed?
That question is highly relevant, given that there are estimates of there being 10-odd crore cryptocurrency investors in India.
Crypto investments in India have increased to over $10 billion in November 2021, from $0.9 billion in April 2020, according to Credit Rating for Exchanges Blockchains and Coin Offerings (CREBACO).
At present, there are no explicit provisions dealing with taxation of cryptocurrencies under the income-tax act, 1961. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is expected to clarify on this aspect.
Meanwhile, Moneycontrol reached out to three tax experts to understand their viewpoints on how to tax gains made from trading or investing in cryptocurrencies. Here are the views:
Sudhakar Sethuraman, Partner at Deloitte India
In the absence of any specific provision on cryptocurrencies in present-day tax laws, it is pertinent to note that the definition of “income” under the act is wide and it includes “profits and gains from business” and capital gains under sale of capital assets.
Suppose, the intention of the seller was inclined towards trading in cryptocurrencies as stock-in-trade, i.e., the trading is justified with significant volumes and frequency of trades, one may conclude that the income from trading cryptocurrencies can be treated as business income. Expenditure incurred in connection with the above can be claimed as a deduction. The net income from business will be taxable as per applicable slab rates.
Also read: Cryptocurrencies Bill: Why investors shouldn’t press the panic button
Cryptocurrencies may be considered as capital assets. Where the intention of the seller is to invest and hold them in the portfolio, then one may conclude that the gains or losses from such investment be treated as “Capital Gains.” Now, capital gains can be classified as long-term and short-term on the basis of the period of holding such cryptocurrencies, i.e., if held for over 36 months, it will be treated as long-term capital gains and taxable at 20 per cent and if held for less than 36 months, it will be treated as short-term capital gains taxable at applicable slab rates.
Further, the guidelines on disclosure requirements of a person holding cryptocurrency in the tax return with respect to Foreign Asset Schedule and Assets & Liabilities schedule is awaited. Expect more clarity in the upcoming Budget 2022.
Also read: Cryptocurrencies Bill: Why investors shouldn't press the panic button
Amit Singhania, Partner at Shardul Amarchand Mangaldas & Co
Presently, the market consensus is to treat and tax cryptocurrencies as capital assets (unless held as inventory) till proper legislation comes through. Further, there are no clear guidelines as to whether cryptocurrencies are to be treated as foreign assets or not. The general inference is that since crypto-currencies are digital assets, their origin will be determined by the location of their servers. Accordingly, crypto-currencies having servers outside India may have to be disclosed as foreign assets in the ITR of the taxpayer.
Also read: Why disclosure of your cryptocurrency holdings in some situations becomes necessary
Ameet Patel, Partner at Manohar Chowdhry and Associates
Like any other security, taxation of profit from trading in cryptocurrencies would be relatively similar. If you are a trader in cryptocurrencies, then you would need to maintain books of accounts, prepare a balance sheet and profit-and-loss account, and so on. After setting off expenses, if any, you arrive at your net profit and pay tax.
The real complications would arise when the taxpayer claims that she is an investor and not a trader. In such a case, it is likely that the government of India will be conservative rather than liberal, while computing and taxing capital gains from cryptocurrencies. I expect short-term capital gains from cryptocurrencies to be taxed at normal tax rates (30 percent being the highest in case of individuals) and long-term capital gains to be taxed at 20 percent. My guess is that the period of holding for such an asset to be considered as long-term would be defined to be “not less than 36 months.” I do not think crypto currencies would be treated as a “security” under Securities Contracts (Regulation) Act, 1956.