crypto-currencies: invest in crypto-currencies? Know the tax implications

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The consecutive lockdowns made people realize the importance of having a passive source of income and in search of this Indians have tried different things to generate money. Some have started their own home businesses and some have started investing in IPOs and real estate. However, many people choose to invest in cryptocurrencies. According to a report, more than ten million crypto investors were added in India in 2021.

It seems that hesitation about crypto culture is diminishing at a steady rate in India. People find great opportunities with great returns on investment (ROI). However, despite the huge growth in the number of cryptocurrency traders and investors, people are concerned on the tax front and the future of assets in India. Let’s talk about the tax implications on cryptocurrency in India. We would like to inform you that all details provided are for your knowledge only.

Taxability of cryptocurrency

The Reserve (RBI) has yet to grant Bitcoin or any other cryptocurrency legal tender status in India. Therefore, there are no clear rules or guidelines defining the taxation of cryptocurrencies, which requires specific clarification from the Income Tax (IT) service.

However, it is not a good idea not to pay taxes on profits from the sale of cryptocurrencies. All income, with the exception of expressly exempt income, is subject to income tax. This means that investors will be required to pay taxes on cryptocurrency investments.

Nature of the investment

In common income tax parlance, the taxation of cryptocurrencies should depend on the nature of the investment, whether held in currency or in assets.

Profits from the sale of cryptocurrency may be taxed as business income if traded frequently, or as capital gains if held for investment purposes. However, it should be noted that, if it is considered business income, the profit may be taxed at the applicable slab rate; but if it is held for investment purposes, the taxation may be the same as the tax gain in the form of capital gains.

It also means that, if the taxpayers have used their investments within three years, short-term capital gains according to the relevant tax brackets will apply. However, if the repurchase occurs after 3 years, it can then be treated as a long-term capital gain and can be taxed at 20% with indexation.

Meanwhile, some experts believe that profits from cryptocurrencies can be treated as income from other sources. We can also think of profits from frequent transactions as income from speculative trading income. However, more details and discussion will be needed to understand it better.

What about mining?
Cryptocurrency generated by mining is a self-generated fixed asset and can be taxed as a capital gain, but Article 55 of the 1961 Computer Law, which deals with the cost of acquisition and improvement, does not not recognize it.

However, according to some online sources, cryptocurrency mining can be considered a taxable event. The fair market value or cost basis of the coin is the price at the time the miner mined it.

It should be noted that you may qualify for a business deduction for equipment and resources used in mining. The nature of these deductions depends on whether or not you have mined the cryptocurrency for personal gain. If you operate a mining business, you can take advantage of deductions to lower your tax bill. But you cannot benefit from these deductions if you have mined cryptocurrencies for personal use.

Disclosure of cryptocurrency income
It is a well known fact that taxpayers with income above 50 lakh per year are required to disclose their assets and liabilities in the schedule of assets and liabilities as well as the acquisition cost. Since cryptocurrencies can also be considered as assets, taxpayers should also include cryptocurrencies in the table above.

In addition, resident and ordinary resident taxpayers must also report their foreign income and assets in their income tax return or tax returns.

If we also consider the tax and criminal consequences under the Black Money Law and Law (Undisclosed Foreign Income and Assets) and the Tax Imposition Act 2015, it may make sense for taxpayers to disclose cryptocurrency holdings in foreign assets or income schedule. .

When it comes to the taxation of cryptocurrency in India, so far there are no official announcements or guidelines regarding the adoption of cryptocurrency and the taxation of it. Thus, we have to wait for government guidelines to know more details about the taxation of cryptocurrency.

(The author, Amit Gupta, is Managing Director of SAG Infotech. The opinions are his)

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