Tax Implication on Cryptocurrency in India

Tax Implication - Cryptocurrency in India - Taxscan

The two continuous lockdowns due to COVID-19 have made people understand the importance of having a passive income source, and consequently, a lot of people choose to invest in cryptocurrencies.

People are finding a great opportunity to make good returns with it. However, even after an enormous growth in the number of cryptocurrency traders and investors, people are worried about the taxation on cryptocurrency in India.

Cryptocurrency in India may attract tax liability, but the rules are still unclear as the Reserve Bank of India has not yet granted this asset class the status of a legal tender.

However, in March 2020, the Indian Supreme Court permitted banks to handle cryptocurrency transactions from traders and exchanges in the case of Internet and Mobile Association of India vs. Reserve Bank of India.

How is cryptocurrency acquired or generated?

Cryptocurrency can be generated or acquired by Mining, Buying, and as legal tender. Mining crypto is when an individual miner uses computing technology to solve complicated algorithms/codes/equations and record data on the blockchain. In exchange for this work, one may receive payment in new crypto tokens. In the case of buying it means buying it from currency exchanges using real currency and storing it in an online currency wallet in digital form. It can be used as consideration for the sale of goods and services, instead of real currency.

Tax implications

If cryptocurrency is to be classified as currency, then the said transaction will not be exigible to taxation under the Income Tax Act, 1961. Cryptocurrencies are not recognized as currency by the RBI and the word ‘income’ as defined under section 2(24) of the ITA provides an inclusive list not covering ‘money’ or ‘currency’. On the other hand, if cryptocurrency is considered as property/goods, then it would fall under the heads of either ‘Capital Gains’ or ‘Profit and Gains from Business or Profession’.

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 department.

However, experts have speculated upon various possibilities in which cryptocurrency transactions can be taxed under the Income Tax Act 1961 as well as the Central Goods and Services Tax (CGST) Act, 2017 depending on the type of transaction.

It is noteworthy that the Ministry of Corporate Affairs (MCA) has made it mandatory for companies to disclose cryptocurrency trading or investments during the financial year.

Income Tax Implication

As per regular income tax parlance, the taxation on cryptocurrencies should depend on the nature of the investment, whether it is held in the form of currency or in the form of assets.

Taxability under ‘Capital Gains

Cryptocurrency can be deemed to be a capital asset if it is purchased for the purpose of investment by a taxpayer. As per Section 2(14) of the ITA, a capital asset means property of any kind held by a person, whether or not connected with his business or profession. The term ‘property, though has no statutory meaning, yet it signifies every possible interest which a person can acquire, hold or enjoy. Therefore, any gain arising out of the transfer of cryptocurrency may be considered as capital, if it is held for investment. 

The crypto transactions could be treated as long or short-term capital gains, depending on the holding period. If investors hold cryptocurrencies for 36 months or more, the gains would be taxable as long-term capital gains, and if less than 36 months, it would be short-term capital gains. Short-term capital gains are taxable as per the slab rates applicable to a taxpayer. And long-term capital gains are taxed at the flat rate of 20% with the benefit of indexation.

Taxability under Profit and Gains from Business or Profession

Profits from the sale of cryptocurrency can be taxed as business income if traded frequently, or as capital gains if held for investment purposes. However, it needs to be noted that, If considered as business income, then 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 tax gain in the form of capital gains.

It also means that, if taxpayers utilized their investments in between three years, then short-term capital gains according to the relevant tax slabs will be applicable. However, if the redemption happens post 3 years, then it can be treated as long-term capital gain and can be taxed at 20% with indexation.

Income from other Sources

The 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 it better.

GST Implication

With the Indian government mulling over new laws to regulate cryptocurrencies in the country, the indirect tax department is looking into whether overseas exchanges need to pay the Goods and Service Tax (GST) at 18%.

The 18% slab is meant for capital goods and industrial intermediaries, among other times, while the highest slab of 28% applies to luxury goods, like automobiles. It’s the same as the tax on brokerage with trading in conventional shares on the stock market.

In order to bring them under the tax umbrella, the Indian government could categorize overseas crypto exchanges with Indian users as Online Information Database Access and Retrieval (OIDAR) services.

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