Cryptocurrency is a digital currency that is used as a medium of exchange. Bitcoin, the most popular one, is one of the largest trading cryptocurrencies. When these first gained prominence in our country, they were touted to be more reliable than real money. However, the status of investments in the form of virtual currencies wasn’t clear.
Fast forward to the present times, and the Indian cryptocurrency market holds around 7-8 million active traders, whose total investments are more than 1 billion. The cryptocurrency paradigm is continuing to boom despite the global pandemic affecting the economy.
In the past six months, the price of Bitcoin has increased by six times. And this positive volatility is making people view cryptocurrency as an investment form that provides quick returns.
Nonetheless, this volatile nature is also making it susceptible to misuse. This is one reason why the government is trying to clear its ambiguous stance on taxation and the validity of such investments.
So, if you trade in crypto, take a closer look into the following sections and see how your income and profits will be subject to taxation.
Cryptocurrency Space in India
Before delving into the taxation provisions, let’s look into the significant regulatory challenges in the cryptocurrency space in the past decade. This will help you know the cautious stance India took towards monitoring the use and transactions involving cryptocurrency.
It all began in 2013 when the Reserve Bank of India cautioned the users and the investors of the virtual currencies, saying the legality of holding such assets is still under review. This already exhibited the skepticism of the authorities.
In 2018, RBI issued another circular restricting banking and other financial institutions from involving in crypto transactions. It was more of a formal restriction on the use and transactions involving virtual assets. And not to mention, this caused a significant setback in the crypto sector in India.
To add fuel to the flames, the Finance Ministry Committee, formed just after the RBI’s press release, recommended banning the use of cryptocurrencies in India. Further, they proposed to draft a bill to regulate the crypto sector.
This Bill called Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 proposed to put an absolute ban on decentralized virtual assets. Instead, it came up with the idea of a “digital rupee.”
Later, in 2020, the Supreme Court struck down the order of the RBI on constitutional grounds and lifted the ban on cryptocurrency, saying it is the fundamental right of the traders. Consequently, this order came as good news to the cryptocurrency-based platforms in the country.
As per reports by moneycontrol.com, during the nationwide lockdown in 2020, the trading volume of cryptocurrency increased by 400% in India.
Now that you have an idea of how cryptocurrency has been dealt with, we will elaborate on how the government plans to tax your profit and income from these virtual assets.
Taxation on Profit and Income from Cryptocurrency
As of now, there isn’t any separate statute in the Indian laws detailing the taxation provisions for cryptocurrencies.
However, in March 2021, the Ministry of Corporate Affairs has made it compulsory for the companies dealing with crypto assets to present the profit or loss incurred on the dealings. And the investments they hold in the form of virtual assets also need to be disclosed in the balance sheet. These amendments have come into effect from the 1st of April, 2021.
The Indian authorities have still not come up with any precedent as to how the returns from the cryptocurrency will be taxed. But, the analysts are coming up with different scenarios to explain how crypto assets can be taxed.
Lets’s take a closer look into these:
Cryptocurrency held as investments
If cryptocurrency falls under the bracket “Capital Gains,” you will be taxed depending upon the period you are holding these virtual assets. Depending on the period, they would fall under long-term capital gains or short-term capital gains, and you will be taxed accordingly.
Cryptocurrency is held as stock-in-trade.
Recently, the Minister of State for Finance, Anurag Singh Thakur, stated that the total income would include income from all sources, irrespective of its legal status.
Therefore, if trading via crypto assets leads to income generation, you will have to pay taxes depending upon the tax slab you fall into.
In the case of bitcoin mining (mining for cryptocurrency)
Bitcoin (or cryptocurrency) mining involves acquiring new bitcoins and is a capital-intensive activity. It requires one to spend loads on electricity and expensive hardware.
As bitcoins generated from the process are self-generated assets, there is uncertainty whether these will fall into the bracket of “income from other sources” or the provision of capital gains will be implemented.
For payment of goods and services
When a vendor receives payment in cryptocurrency, it will fall under income from the business. Therefore, the concerned person will be taxed under the head “profits from business or profession.”
Depending on the amount you earn from such transactions, your total income will be taxed according to the applicable slab rate.
How is cryptocurrency taxed in other countries?
To add more clarity to the ambit of taxation, let’s see how cryptocurrency transactions are taxed in countries like Britain, the USA, and Singapore.
Britain: If buying and selling of crypto assets are done frequently, in an organized way, and if this leads to a financial trade, it falls under the bracket “trading profit /loss.” Otherwise, it is taxed as per the provisions of capital gains.
USA: Except for the cases where the virtual assets are earned from mining, the cryptocurrencies are seen as “property” and taxed as capital assets.
Singapore: The organizations that use crypto assets in their business are taxed under the bracket “profits from Income Tax.” But, establishments that hold cryptocurrencies for long-term investment purposes do not fall under taxation as capital gains tax is non-existent in Singapore.
A closer look at the recent propositions
Recent Lok Sabha Bulletin indicates that a new bill on the regulation of the crypto sector will be tabled before the Parliament. It has been named Cryptocurrency and Regulation of Official Digital Currency Bill.
Since the exact intention behind this is still unclear, the extent to which the cryptocurrency platforms will be impacted stays uncertain. But, various reports suggest that although there are reasons for banning (misusing crypto in illegal financial activities), the main focus of this Bill would be to protect the interest of the investors and the consumers.
Although various authorities have made it clear that income or interest accrued from crypto assets will be taxed, we still need clarity from the government on how the taxation issues will be addressed.
Therefore, for the time being, it’s better you stay equipped with the scenarios explained and wait for the government to come up with taxation laws!