Know how to pay income tax on cryptocurrencies

A cryptocurrency is a digital asset that is decentralised and used as a means of trade. In 2009, Bitcoin became the world’s first digital currency. In India, there have been substantial regulatory problems in the digital currency field. 

The trade volume of cryptocurrencies in India soared by 400% during the nationwide lockdown, according to moneycontrol.com.

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The Ministry of Corporate Affairs stipulated that companies dealing with digital currencies must publicly release profit or loss accrued on crypto transactions, as well as the amount of crypto held in their balance sheets at the reporting date, on March 24, 2021, in what could be the first step taken by the administration to legislate cryptocurrencies and related transactions in India.

Taking effect from April 1, 2021, these changes were made to Schedule III of the Companies Act.

The tax implications of cryptocurrency earnings in India are still unknown under Indian income tax legislation.

It’s worth noting that India’s tax authorities have yet to categorise cryptocurrency returns into any precise category, and there are no legal precedents in this area.

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To comprehend the taxability of cryptocurrencies, one must first determine whether they are classified as cash or goods/property.

Taxation of cryptocurrency transactions in India

If cryptocurrency is regarded as currency, the transactions will be exempt from taxation under the Income Tax Act of 1961 (“ITA”).

The RBI does not recognise cryptocurrency as currency, and the definition of income under section 2(24) of the ITA does not include the terms “money” or “currency.”

Cryptocurrency, on the other hand, would come under the headings of either “Capital Gains” or “Profit and Gains from Business or Profession” if it is regarded property/goods.

The insinuation that cryptocurrency profits will be taxable is now certain, with Anurag Singh Thakur, Minister of State for Finance, stating on March 28, 2021, that “the gains arising from the transfer of cryptocurrencies/assets are taxable under a head of income, based on the nature of holding the same.”

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As a result, India has decided that cryptocurrencies will not be considered as currency and would be subject to taxation.

The main question is whether virtual currency revenue is taxed as capital gains or as business income. If a seller works as a trader, his or her earnings should be taxed as business income.

If the income is not derived from a company, it will be taxed as capital gains.

Taxability under the heading of “Capital Gains”

If a taxpayer purchases cryptocurrency for the purpose of investing, it may be considered a capital asset.

Despite the fact that the term “property” has no legal definition, it refers to any and all potential interests that a person might obtain, possess, or enjoy.

As a result, if cryptocurrencies are held for investment, any gains deriving from their transfer may be deemed capital gains.

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Depending on the holding time, infrequent crypto transactions might be classified as long or short-term capital gains.

Long-term capital gains would be taxed if investors held cryptocurrencies for 36 months or longer, while short-term capital gains would be taxed if held for less than 36 months.

Short-term capital gains are taxed at the individual taxpayer’s slab rate. Long-term capital gains are also taxed at the flat rate of 20% with the benefit of indexation.

Taxability under the heading of ‘Profit and Gains from Business or Profession’

However, if the transactions are large and frequent, the taxpayer may be seen to be trading in cryptocurrencies, with any gains taxed as business income.

Similarly, if cryptocurrencies are kept as a “stock in trade,” profits earned from them will be taxed as business income.

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As a result, trading in cryptocurrencies on a regular basis and profits earned will be taxable as business income.

Although the revenue authorities may argue that such trading is considered speculative income, this would have a negative impact on taxpayers.