Since cryptocurrencies aren’t mentioned under the I-T Act in India, there’s a lot of confusion regarding how to classify this income
In April, the Reserve Bank of India had mandated that all financial institutions under its control must stop servicing cryptocurrency exchanges and other crypto-related businesses within three months. Giving them a deadline of July 6, the RBI has instructed banks to terminate their existing relationships with firms or individuals dealing in cryptocurrencies. Last week, this decision was backed by the Supreme court of India that said that the RBI’s directive will remain implemented.
A number of investors had anticipated this move had exited their positions right after the RBI directive. These individuals will come under the tax bracket and will have to figure out the slab rate and do the needful. However, there are individuals who believe in the crypto ecosystem and are still holding on to their positions. In the absence of a clear categorisation or recognition of the crypto assets by the government, it will be difficult for tax authorities to ascertain a benchmark value for crypto assets.
A "fair market value" shall be estimated to be the price it would fetch if sold in the open market on the valuation date. But in the open market, a conversion from crypto to rupee is not available. Hence, a valuation might not be possible at all, leaving no options for tax authoritirs to collect any gains on crypto assets.
While the RBI has been making a lot of noises against cryptocurrencies, the Indian Income Tax department has largely been silent on the subject. This means that for those who made a profit by selling their cryptocurrencies, there is no clarity on how to declare this income. So let’s see how can you ensure your tax returns from the income you have generated from trading in cryptocurrencies:
Since cryptocurrencies aren’t mentioned under the I-T Act in India, there’s a lot of confusion regarding how to classify this income. Having said that, you cannot escape paying tax on your income from cryptocurrencies.
Taxed as capital assets
If you do consider them as capital assets, you will have to also consider the duration of holding the cryptocurrencies to determine how to pay tax on it. Long-term gains from crypto trading will be taxed at 20% and short-term gains would be taxed as per the individual’s slab rate. However, the IT act does not define what a valid time period is for crypto assets. This part of taxation will arise if you have traded in cryptocurrencies and earned some decent profit from the trades.
Taxed as business income
There are also individuals who are into constant mining and trading of bitcoins. This becomes a business income for them and the tax will vary as per the income slabs – under Rs 5 lakh 5%, Rs 5–10 lakh -20% and above Rs 10 lakh -30%.
As a common practice, chartered accountants and other financial experts are also considering putting this income in the ‘income from other sources’ bracket. This bracket has a flat tax slab of 30% the total income generated.
There is no denying the increasing acceptance of cryptocurrencies in India. Hence, the government and the regulatory bodies need to be absolutely certain and transparent in their communication when it comes to taxation. The ideal scenario here would be to take advice from your own financial planner and then pay the taxes. As mentioned, there is no escaping taxation on cryptocurrencies.
The writer is, COO, Belfrics Group
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