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Cryptocurrency taxation
Cryptocurrency taxation in India
Cryptocurrency exchanges provide a platform for buying and selling cryptocurrencies. In India, the dealings in cryptocurrency are not regulated by a body or Government. However, the buying and selling takes place thanks to the Supreme Court’s ruling allowing for carrying on business by the cryptocurrency exchanges. The ruling was rendered in the case of Internet and Mobile Association of India v Reserve Bank of India [WP(c) No. 528/2018 dated 4 March 2020. The RBI is the apex body on the availability of finance through banking channels to the cryptocurrency exchanges and hence regulates the financing part. However, the Government is yet to frame law on regulating cryptocurrency trades or investment in India.
A person buying or selling cryptocurrency and making gains or losses is liable to taxation in India. Crypto investments would be subject to tax on the gains/profits made by crypto investors/traders. It is necessary to understand the nature of the income to know the tax liability.
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Gains made by crypto investors
Cryptocurrency as an investment becomes an asset where gains are taxable as capital gains. If the period of holding is up to three years, the gains are short term capital gains taxable as per the slab rates. However, if the period of holding is greater than three years, the gains are taxable as long-term capital gains and taxed at 20% tax rate, after allowing indexation of the cost. Note that the tax rates are subject to applicable cess and surcharge.
Whether or not cryptocurrency gets allowed or banned by the Government in India, the gains are liable to tax.
Profits made by crypto trades
In case the nature of dealings in cryptocurrency is such as that is business, the gains or losses are taxable as income from business. Any profit or gain on the sale of cryptocurrency held as stock-in-trade could become taxable as income from business. Such conclusion is likely where the intention is to trade in the cryptocurrency and not hold them as investments. Those held as investments get taxed under capital gains based on their period of holding (as discussed above). The frequency of the trade is also a basis for taxing under income from business.
If the case falls under income from business, the taxpayer may need to maintain books of accounts and even get accounts audited where the turnover crosses the limit of Rs 1 crore.
Disclosure of cryptocurrency in income tax return and books of accounts
A taxpayer investing in cryptocurrency need not disclose assets in the income tax return. However, in case where the total income of the taxpayer exceeds Rs 50 lakh, the crypto investments need disclosure while filing the ITR. Separately, a resident in India who holds foreign assets is also required to disclose the foreign assets in their ITR. This disclosure is not required for a NRI or not ordinarily resident.
A trader in cryptocurrency should disclose the stock-in-trade as part of the books of accounts maintained by them. Separately, companies having cryptocurrency as assets or stock-in-trade and the gains or losses from cryptocurrency transactions.
The taxation of cryptocurrency and the law regulating the transactions is evolving and hence one would need to carefully evaluate the tax impact and disclosure requirements.