Made gains from cryptocurrencies? Know the income tax implications

The two back-to-back lockdowns made people realize the importance of having a passive income source. Some started their own business from their homes, while a few others invested in IPOs and real estate. However, a lot of people choose to invest in cryptocurrencies as well. As per a report, a growth of over 10 million crypto investors has been reported in India in 2021.

It can be easily seen that the hesitation and dissatisfaction with the cryptocurrency culture in India is decreasing at a steady pace. People are finding a great opportunity to make good returns with it. However, even after an enormous growth in the number of crypto currency traders and investors, people are worried about taxation on cryptocurrency in India. They are worried about its future here.

Here are the tax implications of trading in cryptocurrencies.

Taxability of Cryptocurrency

The Reserve Bank of India (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 incomes except the explicitly exempted ones is liable to tax. This means investors will be liable to pay taxes on cryptocurrency investments.

Nature of investment

The taxation on cryptocurrencies should depend on the nature of investment: is it held in the form of currency or as 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. As business income, the profit can be taxed as per the applicable slab rate. But if it is held for investment purposes, then taxation can be the same as applicable to capital gains.

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

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

Also read: Millennials and cryptocurrencies: A story of missed profits, hard lessons and losses

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 recognize it.

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

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 or personal gain. If you run a mining business, you can avail deductions to cut your tax bill. But you cannot avail these deductions if you mined cryptocurrencies for personal gains.

Disclosure of income from cryptocurrencies

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

Additionally, taxpayers who are residents and ordinary residents also have to disclose foreign income and assets in their 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.

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 for more details about taxation on cryptocurrency.