How to treat cryptocurrency while filing your ITR


With cryptocurrency being the buzzword in financial circles this year, India has seen massive growth in blockchain-based digital currency. With Indians having invested close to $6.6 billion in cryptocurrency, there’s a lot of talk about the government coming up with norms to regulate it.

While that’s still a decision that has to be taken, there are plenty out there who would like to know how to treat crypto while filing their Income Tax Returns.

What are cryptocurrencies and how are they viewed?
A cryptocurrency is a digital asset and a means of exchange that is decentralised and based on blockchain technology. In layman’s terms, cryptocurrencies are digital currencies that are designed to be used to purchase goods and services, much like our other commonly used currencies.

In today’s world, there are more than 1,500 different virtual currencies to choose from, including Bitcoin, Dogecoin, Ethereum, Litecoin, Ripple, Matic, and many others. While the Government of India is in the process of bringing in cryptocurrency regulations, currently pending approval from the cabinet, the amount of money invested in cryptocurrencies has increased dramatically.

So yet, the government has not recognised bitcoin as a legal tender in any capacity. Neither the Income Tax Department has provided any explanation on the tax implications of gains derived from crypto-transactions.

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Can crypto be taxed for ITR?
As a result of the bitcoin boom last year and the Supreme Court of India’s decision to abolish the Reserve Bank of India’s prohibition on cryptocurrencies, many investors in India have turned to virtual currencies with the aim of generating windfall profits from their investments. We explain how earnings from cryptocurrency should be reported on an income tax return.

First and foremost, it’s crucial to understand that the profits generated from the sale of cryptocurrencies could be classed as either capital gains or business income under the tax code. Based on the categorization, it will determine which tax return form will be required to be filed and how much tax would be assessed on the profits.

An asset of any kind held by an individual, whether or not related to his or her company or profession, is defined as a capital asset under Section 2(14) of the Income Tax Act 1961. Despite the fact that the term “property” does not have a formal definition, it refers to any and all possible interests that an individual can acquire, own, or enjoy.

Therefore, if bitcoin is purchased by taxpayers with the intention of making investments, it could be considered a capital asset under the law. Any gain realised as a result of the transfer of cryptocurrency will be subject to capital gains taxation.

In contrast, if the transactions are significant and frequent, it may be determined that the taxpayer is engaged in cryptocurrency trading. Profits from cryptocurrency sales would be subject to taxation as business income in this situation.

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Taxing crypto for ITR:
However, as far as India is concerned, you will not be able to identify any businesses that deal with cryptocurrency. When it comes to equities and commodities, you will find brokers and traders who deal on a regular basis, but when it refers to cryptocurrencies, you will never find a broker who is keeping a virtual currency in his portfolio as a stock in trade.

As a result, any profits made from investing or trading in bitcoins or virtual currencies are taxed as capital gains, and in order to calculate capital gains, one must first determine the length of time that the assets were held. For instance, with regard to gold as an investment, if the asset is held for more than 36 months, the gains are taxable as long-term capital gains (LTCG), and if held for less than 36 months, the gains are taxable as short-term capital gains (STCG) (STCG). However, for cryptocurrencies, no such legal clarity is available from the tax authorities as yet.

Despite the fact that the Income Tax Department has not issued any explanation on the subject, investors are required to pay tax on crypto-transactions dependent on the type of the transactions.

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Generally speaking, profits on the sale of cryptocurrencies are taxable in the following ways under federal income tax law:

(i) Business income
(ii) Capital Gains

(iii) Additional or other sources

The classification of these transactions will be determined by the nature of the transactions as well as the intent of the investor.

  • Business income:
    The profits generated by cryptocurrency transactions will be taxable as “business income” if the trades are regular and the volume of transactions is large. Alternatively, if the goal of holding them for a longer period of time is to benefit from a rise in value with fewer trades, they may be subject to taxation as ‘capital gains.’

If a taxpayer is uncertain about the correct classification for bitcoin transactions, he or she may seek the assistance of an expert to examine the classification for cryptocurrency transactions on an annual basis.

  • Capital gains:
    The gains or losses resulting from crypto-transactions will be taxed under the heading of capital gains if they are recognised as “investments.”

The amount of cost that exceeds the amount of sale value will be used to compute capital gains. If the cost of the purchase exceeds the value of the transaction, the transactions will be classified as “capital losses.”

If the sale of bitcoin is declared as business income, the implications of the Goods and Services Tax (GST) legislation should be considered. In order to deduct all indirect costs from the gains realised by selling crypto assets, the charges must be documented. The gains will be applied to the other sources of income and taxed at the rates applicable to the income tax slabs.

  • Other sources of income:
    When completing an ITR, crypto-assets can alternatively be recorded as “income from other sources” and taxed in accordance with the law. Income from other sources is added to the final income and taxed in accordance with the taxpayer’s tax rate and taxation bracket.

Additionally, some believe that the revenue from crypto assets should be treated as “speculation business income” and taxed at the highest rate possible. Taxpayers, on the other hand, may benefit from treating it as normal business income or capital gain until the income tax authorities provide clarification.

Finally, what about mined bitcoins?

Self-generated capital assets include bitcoins generated during the ‘mining’ process, which are classified as such. The taxpayer can make use of the Supreme Court’s decision in B.C. Srinivasa Setty [1981] 5 Taxman 1 in order to recover the cost of acquiring such Bitcoins, because the cost of purchase of such Bitcoins is not known (SC).

In this case, it was determined that if the cost of acquisition of an asset could not be determined, the machinery provision for computing capital gains would fail, and as a result, no capital gains could be imposed on the transfer of such assets. As a result, Bitcoins generated through the “mining” process may well be exempt from taxation.

Disclaimer: The above content is non-editorial, and TIL hereby disclaims any and all warranties, express or implied, relating to the same. TIL does not guarantee, vouch for or necessarily endorse any of the above content, nor is responsible for them in any manner whatsoever. The article does not constitute investment advice. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified.

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