Despite uncertainty on the regulation of cryptocurrencies, India has the highest number of crypto owners in the world at 10.03 crore. Purchases of cryptocurrencies by Indians have reached an all-time high of $10 billion, from $923 million in April 2020.

If you are interested in investing your money in cryptocurrencies, you need to understand possible tax implications. The question of how cryptocurrencies could attract tax is a common one asked by investors.

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The Reserve Bank of India had in 2018 banned banks and other financial institutions from facilitating transactions in cryptocurrencies. The Supreme Court in 2020 reversed the order, allowing trade of virtual coins like Bitcoin and Ethereum. 

The government, on its part, has made it mandatory for companies dealing in virtual currencies to disclose profits from such activity. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, has been tabled in Parliament and will be discussed during the Winter session.

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At present there are no specific  provisions for cryptocurrencies in the Income Tax Act, 1961. But if you have invested in and gained from cryptocurrencies you have to report them. Here are some ways in which cryptocurrencies could be taxed in India.

A digital token is considered to be a capital asset if it is purchased for investment and it can be taxed for capital gains. If cryptocurrencies are held for more than 36 months, profits arising from them could be categorized as long-term capital gains and might be subject to 20% tax, plus applicable surcharge and cess. The tax amount could be  adjusted for inflation.

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Profits arising over a period shorter than 36 months could  be classified as short-term capital gains. Such gains could be listed as  “other income”  and may be subject to the tax slab for specific income tax brackets. For instance, if you are in the 10% tax bracket, then a tax of 10% could be imposed on your crypto profits.

If cryptocurrency transactions are required to be reported as business income, trading  revenue would become subject to tax according to slab rates. There could also be goods and services tax (GST) implications, along with  deductions. The profits would, of course, be considered other income and taxed in accordance with income tax slab rates.

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The government may also impose 18% GST on foreign cryptocurrency exchanges. It has also considered a 2% equalization charge on transactions with foreign cryptocurrency exchanges. For Indian cryptocurrency exchanges, 18% GST is already levied. 

It is unlikely to be long before you have to start paying taxes  on profits made through cryptocurrency trading. This could be a good time to start keeping records of all your transactions and to seek guidance from accountants and tax experts.