Taxation on Cryptocurrency

Legality of Cryptocurrency in India

The government of India is yet to provide cryptocurrencies with legal status. The RBI attempted to enforce a ban by restricting banking services to cryptocurrency exchanges in 2018. However, the Supreme Court overturned the ban since these digital currencies have not caused any evident harm to the banks regulated by the RBI. So far, no clarification has been made by the income tax department with respect to the gains earned from cryptocurrencies.

Is Crypto an Asset or a Currency

There has been an ongoing debate about whether cryptocurrencies should be classified as a 'currency' or an 'asset.' The terms cryptocurrency and crypto-assets are frequently used interchangeably. However, identifying it as a 'currency' requires the government's legal support. Thus, without any legal backing, it is safe to categorise it as an 'asset/property.'

Because the tax implications would emerge regardless of legality, designating them as 'assets' would be a preferable method instead of waiting for a government explanation. Furthermore, the US government has issued a statement designating it as a 'property,' implying that capital gains taxes will be imposed on gains on the selling of cryptocurrencies.

Taxation on Gains Earned from Cryptocurrency

Because the Reserve Bank of India (RBI) has not yet legalised cryptocurrency, it is subject to taxation. So, any investor who makes profits by selling cryptocurrency has to pay income tax. All income is taxed unless it is specifically exempted by the Income Tax Act. Therefore, depending on the nature of the transactions, cryptocurrencies will be taxed until the income tax department offers any clarification about the same.

Classification of Nature of Crypto Transactions

1. Capital gains
2. Business income

This categorisation will be determined by the investors' intent and the nature of the transactions. Gains from cryptocurrency transactions will be taxable as 'business income' if the trade frequency is high. Gains from cryptocurrency transactions will be taxed as 'capital gains' if the primary reason for having them is to profit from longer-term value appreciation with fewer exchanges.

Cryptocurrency Categorised as Capital Gains

Cryptocurrency transactions that are considered 'investments' will be treated as capital gains or losses. If the transaction's selling value exceeds the cost, it is deemed a 'capital gain'. If the sale value of the transaction is less than the cost, then such a transaction will be treated as a 'capital loss'.

Short-term capital gains tax will be levied if crypto assets are kept for less than three years according to the applicable income tax slabs. In case crypto-assets are sold after three years, they will be classified as long-term investments, subject to a 20% tax rate with an indexation advantage.

Cryptocurrency Categorised as Business Income

If cryptocurrency transactions are declared as business income, the implications of Goods and Services Tax (GST) must also be considered. All direct and indirect expenditures will be deducted from the profits earned by the selling of crypto assets. Such profits will also be added to other income and subject to tax at the applicable income tax slab rates.

GST Implications if Considered as Business Income

GST is applicable to the supply of goods, services, or both. 'Supply' is a broad concept that spans a wide range of transactions. Anything that isn't securities, goods, or money is considered a service. It comprises activities involving the use of money or its conversion to cash or any other way for which a separate fee is levied.

Therefore, from the aforesaid definition, GST may be levied on the purchase and sale of cryptocurrencies. The Central Economic Intelligence Bureau (CEIB) has recommended classifying cryptocurrencies as intangible assets and imposing GST on all cryptocurrency transactions. The taxability of cryptocurrency transactions has not been specified by the Indian government yet. The proposal is still being debated and an 18% GST might be applicable in the future.

Cryptocurrency Categorised as Income from Other Sources

Crypto-assets can be treated as 'income from other sources' on ITR forms and taxed appropriately. The other sources of income are included in the total income and taxed according to the taxpayer's tax bracket. There are other opinions that the income from crypto assets should be considered as 'speculation business income' and taxed at the highest rate.

Taxpayers can profit from treating it as capital gains or regular business income until the income tax department provides clarification. However, while filing ITR, it is important to declare the gains and pay taxes accordingly.

Disclosure of Crypto Assets in Schedule of Assets and Liabilities

The Ministry of Corporate Affairs (MCA) has made it essential to disclose gains and losses in virtual currencies. The value of cryptocurrencies as of the balance sheet date is also required to be declared. As a result, revisions have been made to Schedule III of the Companies Act, which will take effect on 1 April 2022. This mandate might be viewed as the government's first step towards the regulation of cryptocurrency.

This mandate only applies to companies; individual taxpayers are not obligated to comply. However, all cryptocurrency investors must disclose and pay taxes on their gains.