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Indian investments in the cryptocurrency have surged to US$6.6 billion in 2021. Where there is profit/loss there is tax? Cryptocurrency gains could happen from multiple ways such as mining, or conventional buying and selling. While the Reserve Bank of India has not granted legal tender status to cryptocurrencies, there is no escape from paying tax on cryptocurrency investment gains. But How is Cryptocurrency Taxed? Note that currently, India does not have a rule around how these cryptocurrencies should be taxed. The confusion is whether to declare them as capital gains or business income or as income from other sources.

Cryptocurrencies are unregulated in India and therefore there is a high potential risk in owning or trading in them.

You must ensure that you are maintaining proper records of all your transactions.

Is CryptoCurrency Banned in India?

In 2018, the Reserve Bank of India (RBI) banned the use of cryptocurrency as legal tender in India.

In March 2020 this decision was overturned by the Indian Supreme Court, permitting banks to handle cryptocurrency transactions from traders and exchanges.

The government has not yet brought the taxability of cryptocurrencies into the statute books. are no clear rules or guidelines defining taxability for cryptocurrencies

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 will be tabled by the government in the parliament. 

But The Ministry of Corporate Affairs (MCA) has made it mandatory for companies to disclose cryptocurrency trading/investments and the amount of cryptocurrency they hold in their balance sheets during the financial year from 1 Apr 2021. Minister Anurag Singh Thakur, clarified that “the gains resulting from the transfer of cryptocurrencies/assets are subject to tax under the head of income, depending upon the nature of holding of the same”.

On 11 Jun 2021, The Enforcement Directorate (ED) issued a notice to India’s crypto exchange WazirX over possible Foreign Exchange Management Act (FEMA) violations for transfers worth INR 27.91 billion (US$372.4 million).

Tax on Cryptocurrency in India

Cryptocurrency can be acquired in many ways like Buying from the exchange, Mining, Trading, and getting it for services. Income Tax depends on the way the cryptocurrency is bought and sold.

There is no specific guidance is available under the income tax act for the taxation of cryptocurrencies. So experts are divided in their opinion.

Depending on the way one gets cryptocurrencies, One has to prove that income from cryptocurrency is a business or an asset class income ie capital gains or just choose the safest mode of income from other sources.

Tax if one Invests in CryptoCurrency: Capital Gains

Countries such as the UK and USA have laid down that cryptocurrencies should be treated as capital assets.

If you are buying and selling a few times in the year then you are an investor. A few times have to be evaluated on a case-to-case basis.

To be treated as Capital assets, Cryptocurrency has to be bought from cryptocurrency exchanges using Indian currency and stored in digital wallets. Unicorn, Bitxoxo, Zebpay, Coinbase, etc., are some of the bitcoin exchanges of India.

Note that buying one cryptocurrency using another cryptocurrency is a grey area with respect to taxation.

If Cryptocurrency is treated as Capital assets then taking the safest option, it is best to consider it Like Debt Funds and Gold Assets.

  • So capital gain on cryptocurrency may be treated as long-term assets when held for a period exceeding three years and short-term assets otherwise.
  • Short-term capital gains may be taxed at slab rates applicable to the taxpayer.
  • Indexation allowed on cost of acquisition allowed.
  • 20% of tax on the Gains
  • If there are capital gains then One cannot file ITR1. An individual can then use ITR2

Tax on Trading in Cryptocurrency, Business Income

If you are buying and selling cryptocurrencies many times in the year then you are a trader.

Trading in Cryptocurrency may be treated similarly to trading in shares. And hence would be taxed as Business Income.

  • Business income is taxed as per the prevailing slab rates plus applicable surcharge and cess.
  • One can claim expenses like purchase cost for, depreciation on computers/laptops, salary, rental expense, the cost for maintenance of accounts, etc.)
  • Accounts may be audited after the threshold is crossed
  • If the turnover crosses a specified threshold, a doubt regarding GST applicability may arise.
  • For individuals having a business income, ITR-3 is to be used.
  • But there are doubts whether loss from the sale of crypto assets can be set off or carried forward

The way forward would probably be to provide a little more clarity in the law with regards to its taxation.

Tax on Mining Cryptocurrency

“Mining” crypto is when an individual miner solves complicated algorithms and records data on the blockchain.

Can Mined cryptocurrencies be treated as self-generated capital assets taxed as capital gain but Section 55 of the I-T Act 1961, which deals with the cost of acquisition and improvement, does not recognize it. Hence the capital gains computation mechanism may not be accepted following the Supreme Court decision as in the case of B.C.Srinivasa Shetty.

Then the income tax authorities may choose to tax the value of cryptocurrencies from mining under the head “Income from other sources”  or as business income.

It needs to be noted that you can avail of a business deduction for the equipment and resources used in mining. The nature of those deductions varies depending on whether you mined the cryptocurrency for personal gains. If you are running a mining business, you can avail of deductions to cut your tax bill. But you cannot avail of these deductions if you have mined cryptocurrencies for personal gain.

Market share of CryptoCurrency

There were over 4,000 different cryptocurrencies in circulation worldwide, including the market giants Bitcoin, Ethereum, Litecoin, and Dogecoin.

As of May 2021, the aggregate value of all the cryptocurrencies in the world stood at US$2.8 trillion. How it is distributed across the various cryptocurrencies is shown in the image below?

As per data from blockchain analytics firm Chainalysis, Indian investments in the cryptocurrency have surged to US$6.6 billion in 2021.

As per a report, over 10 million crypto investors were added by India in 2021

In terms of ownership, in India the top five preferred currencies are bitcoin, with a total share of 75%, followed by dogecoin at 47%, ethereum at 40%, Binance’s coin at 23%, and Ripple’s XRP at 18%.

Best cryptocurrency exchange apps in India WazirX, Unocoin, CoinDCX, Zebpay, CoinSwitch Kuber

Crypto Currency Market in the world

Crypto Currency Market in the world

Disclaimer: All the provided details are for knowledge purposes only. Please consult your Tax consultant or Chartered Accountant (CA) for more details.

There is no official announcement or guidelines till now on cryptocurrency and tax on it. There are conflicting opinions as to how cryptocurrency in India is taxed. Don’t ignore to report the gains on cryptocurrency.