Taxes on Cryptocurrency

Have you heard one of those ‘rags to riches’ story through Bitcoins?

Cryptocurrencies in India are helping thousands create this story for them.

Wait, but wasn’t cryptocurrency illegal in India? Has the government allowed the trade of cryptocurrencies yet?

Cryptocurrency in India is unregulated, but that doesn’t mean that it is illegal. As the Government is currently planning on how to regulate it, the Income Tax Department is clear on the taxation front.

Surprisingly, this ambiguity hasn’t stopped people, especially millennials from jumping on to the crypto train. Indian Millennials are spending millions on trading in cryptocurrency daily. This is highlighted by the growth of Indian Crypto-Exchanges like CoinDCX and WazirX seeing upwards of $25M worth of trading everyday. 

Everyone has heard about BitCoin. However, the recent surge in meme coin like Dogecoin, highlights as some traditional investors call it, the speculative side or the FOMO side of CryptoCurrency Trading.

Regardless, Crypto space is an exciting space and there are some serious questions that we plan to answer through this blog post:

Will my crypto gains be taxed?

Are cryptos legal according to the Indian Government?

If the cryptos are taxed, how do I file them?

Let us dive in a little deep to find answers to all these questions.

Cryptocurrency Trading in India

Crypto trading has faced a lot of regulatory challenges in India. RBI initially banned cryptocurrencies. However, the Supreme Court quashed the RBI ban and legalised  crypto trading again from March 2020 onwards. Since then, banks and financial institutions could trade in digital currencies again. As soon as the ban was lifted, the number of transactions skyrocketed. However, this tip-toeing of the government meant ambiguities persisted for investors, especially in the tax treatment of crypto-gains. 

Ambiguity Around Taxes on Cryptocurrencies

Cryptocurrencies can be acquired in various forms and are not functionally similar to other assets. This has created quite an ambiguity as to how the tax is to be levied on the profit arising from different crypto-transactions.

Let us look at each of the scenarios. It is important to note: regardless of the regulatory ambiguity, income from crypto trade or use will be taxed.

Case 1: Mining

Any cryptocurrency created by mining is a self-generated capital asset. A self-generated asset is any asset which does not cost any thing to the assesses in monetary terms relating to its acquisition or creation.

If you sell the currency further, your profits arising out of it will give rise to capital gains.

However, the twist here is that you cannot determine the acquisition cost of a self-generated asset.

Also, cryptocurrencies do not come under Section 55 of Income Tax Act, 1961, which provides a definition for cost of acquisition of self-generated assets. You can not tax capital gains without knowing the cost of acquisition.

Hence, no capital gains tax will be levied on mining of cryptocurrencies.

Case 2: Cryptocurrency held as an Investment and being exchanged for Fiat Money

The gains realized on holding cryptos for less than 3 Years and exchanged for fiat money will be taxed as Short Term Capital Gain (STCG).

Short term capital gains are taxed at the individual slab rate.

However, if the cryptos are held for more than 3 years as an investment, then they are taxed as Long Term Capital Gains (LTCG).

Long term capital gains are taxed at a flat rate of 20%.

Case 3: Cryptocurrency held as stock-in-trade being exchanged for Fiat Money

If you realise an income in the form of cryptocurrencies by transferring your stock in trade, it will be considered as income from business.

Now, stock in trade is any equipment, merchandise, or materials necessary to or used in a trade or business.

One can in their Income Tax Return classify their crypto trade activity as a part of their business. Then income from crypto currencies will be considered as income from business.

Any such profits would be subject to taxes as per individual slab rates.

Case 4: Cryptocurrency Exchanged Against Sale of Goods and Services

Any cryptos exchanged against sale of goods and services shall be treated at par with receipt of money.

Just like receipt of money, it will be considered as income in the hands of the recipient.

Further, since you received this income out of a business or profession, you will be taxed, normally, under the head profits or gains from business or profession.

So, how to File Taxes on Cryptos?

Now that, it is established that cryptocurrencies are legal in India, it has also been established that you will be taxed on any profit arising out of them.  It is important to know how you should pay taxes on these crypto earnings. 

According to the Central Board of Direct Taxes, it is mandatory that you declare and pay the relevant tax on your income/ profits from your cryptocurrencies.

As mentioned above, any profits arising from cryptocurrency will be taxed as short term or long-term capital gains.

However, because of the ambiguity on cryptos and owing to the fact that Indian Government does not consider crypto as a legal tender of currency, the debate on the head under which they can be declared still continues.

If experts are to be believed some think they come under Income from Capital Gains, while some believe they should fall under Income From Other Sources.

How can Quicko Help you file Taxes on your Crypto Gains?

Quicko has simplified taxes for capital traders in the last 2 years, we are now onto simplifying taxes for crypto traders. Currently, we offer CA assisted Tax preparation and filing for Crypto Traders. But, keep a look out for this place we have some exciting news coming up for Crypto traders!

For any doubts and questions regarding taxes on crypto currencies hit us up at TaxQnA and we’ll be happy to help!