Cryptocurrency is a digital asset that can be a medium of exchange. It can be used to pay for goods and services, but not as much as a fiat currency such as the Indian rupee or the US dollar. Cryptocurrency, as a mode of payment, is at a nascent stage. However, the promise of incredibly high returns has led many people to invest in the various digital currencies available today. More investors are entering the market every day. But besides the market volatility, there is another worry that weighs on crypto investors: How is their crypto earnings taxed?
There is still no clarity about this, in fact, trading in cryptocurrencies in India was only allowed in March of last year, but it is not being legalized.
The ban and its reversal
In April 2018, the Reserve Bank of India (RBI) issued a circular banning cryptocurrency trading in the country and banning banks and other financial institutions from trading cryptocurrencies, effectively preventing investors from transferring money from their bank accounts to their cryptocurrency trading wallets.
In March 2020, the Supreme Court overturned the RBI ruling. The contract followed a statement from the Internet and Mobile Association of India (IMAI). The industry organization, whose members transacted cryptocurrencies with one another, claimed the ban led to a collapse of legitimate business activities through digital currencies such as Bitcoin and Dogecoin.
The surge
This brought relief to those who had already invested in cryptocurrencies by allowing them to resume trading. Others also saw an opportunity to increase the value of their wealth and followed suit. Since the cryptocurrency market in India is not legalized, meaning it has no oversight from the country’s regulator, RBI, there is no official estimate of the number of Indians who have put their money in the sector.
The taxation
With the cryptocurrency trading ban lifted last year, investors are unsure how to report their trading earnings this year. Some may consider avoiding taxes, but it is not advisable. Income tax rules clearly state what types of income are tax-exempt taxes and do not include cryptocurrencies.
The tax liability depends on whether the respective cryptocurrency was held in the form of a currency or an asset. Section 2 (14) of the Income Tax Act states that any property held by a person, regardless of whether it is related to their business or occupation or not, however, if an investor has traded cryptocurrencies frequently, you can report the income as business income . If the virtual asset is held for investment purposes, it is counted as a capital gain. Income from cryptocurrency can also be filed under “Income from other sources”.
The holding period of the cryptocurrency is likely a factor in the tax calculation. If an asset is held for more than three years, it is taxed as long-term capital gain. If it is held for less than three years, it will be taxed as short term capital gains. If someone has earned cryptocurrencies through mining, that would fall into the self-generated capital wealth category. It can be taxed as a capital gain. However, in the absence of clear guidelines from the authorities, it is recommended that an advisory personal prosecutor be consulted prior to filing statements.
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