Cryptocurrency is a relatively new concept in the Indian market. The government is yet to come up with specific rules for the taxability of profits derived from cryptocurrency transactions under the Act. However, since the intent of income tax laws has always been to levy tax on income regardless of its type, levying tax on cryptocurrency cannot be avoided solely because of the form of income in which it is collected.
Before deliberating on the determination of tax implications of income generated through crypto trading, it is pivotal to understand that any gains derived from any transaction in cryptocurrencies face two slabs of classification under Income Tax. Either it can be classified under capital gains or business income. This knowledge is essential to have as the foregoing classification will decide as to which particular tax return form has to be filed and what would be the tax levied on gains derived from the sale of such cryptocurrencies.
The government has extended the deadline for filing of returns for AY 2020- 21 from 31 March 2021 to 30 May 2021. Pursuant to both old and new Income Tax slabs, individuals having an annual income (Net taxable income) of more than Rs 2.5 lakh have to file Income tax returns (ITR).
Highly encouraged and driven by the rally of Bitcoin in 2017 and in the wake of the Supreme Court lifting the ban on cryptocurrencies by setting aside the notification of the Reserve bank of India, numerous investors to make windfall gains started investing in cryptocurrencies.
As mentioned above, the classification of capital gains and business income helps in determining your ITR. Under Section 2(14), IncomeTax Act, 1961, a capital asset is defined as a property possessed by any person, irrespective of any connection between the property and his business/profession. Though there is no statutory meaning associated with the term ‘property’, every possible interest which a person can enjoy or acquire is signified by it.
Primarily, if the purpose of transaction in cryptocurrencies is an investment, then it would be deemed as capital assets. Therefore, any gains from such transaction or transfer of crypto must be taxed under the header of capital gains.
Nevertheless, if the transaction happens frequently and is substantial, it could be regarded as trading and therefore, the income in such case would be deemed under business income as evidenced by the statement of Naveen Wadhwa, DGM at Taxmann. “It is interesting to note that in India, there are no businesses that deal in cryptocurrencies. There is a possibility of you finding brokers or investors who frequently deal in equity and commodities; however, you would not find any broker holding a portfolio of cryptocurrencies,” remarked Wadhwa
As understood from above, any gains from transacting in virtual currencies are deemed to be taxable as capital gains. Now, it is important to look at the period (time) of holding. Long-term capital gains (LTCG) are taxed on gains held for 36 months or longer, while short-term capital gains (STCG) are taxed on gains held for less than 36 months.
STCG are taxed as per the individual taxpayer’s slab limit. LTCG, on the other hand, are levied at a flat rate of 20%, with indexation.
Individuals with taxable income of more than Rs 50 lakh must fill out Schedule AL in ITR forms, which includes details about mutual funds and shares like cryptocurrencies. Furthermore, if a corporation or a partnership firm invests money from their business into a cryptocurrency, they must report it on their balance sheet to comply with accounting principles. ITR-2 and ITR3 are acceptable tax forms for people who have capital gains or business profits from cryptocurrencies.
Interestingly, cryptocurrency generated through the medium of mining comes under self-generated assets. If the classification is considered, then such transactions would usually amount to capital gains. However, the cost of acquisition in case of acquiring any cryptocurrency cannot be determined. It does not fit under the ambit of Section 55, Income Tax Act, 1961 as it only covers the cost of acquisition of self-generated assets. Also, no capital gains calculation process will be consistent with the Supreme Court’s decision in B.C Srinivasa Shetty’s case. As a result, no capital gains tax will be levied on income through cryptocurrency mining.
Quite contrary to the aforementioned view, if IT authorities do not deem cryptocurrency to be a capital asset, capital gains tax would not be applicable. As a result, it would have to be charged under the residual head of revenue, “Income from other sources.”
Since the full purchasing value of cryptocurrencies can be claimed as a deduction under Section 57 of the Act, the tax will be paid at an individual slab rate only on the benefit and not on the selling value.
WAY FORWARD
Nonetheless, several experts believe that a centralised framework should be formulated by the Central government in coordination with the country’s central bank because not only are people unaware of and confused about filing taxes on income earned by crypto trading but even the income tax authorities are in a quandary about it. When the enforcing authority is perplexed, it is extremely difficult for those in the trading profession to follow the rules. However, some professionals, such as WazirX’s Patel, claim that cryptocurrencies should be treated as capital assets and should therefore be reported when filing tax returns.
Another Charted Accountant from Mumbai, who wishes to remain anonymous, told Gadgets 360 that people should declare it as income from other sources and pay a flat 30% tax rate. It is not a legal and legitimate form of currency, according to the same CA, and should therefore be included under the 30% category.
There is no regulatory certainty and other than the notifications, there has been no clarification on how the government wants to tax cryptocurrencies. Instead of outrightly banning it, the incumbent should be oriented towards better regulation and a lucid framework for taxation. Therefore, the only way to remove ambiguities is to pass umbrella legislation on the subject.
Miheer Jain is a research assistant at Infinite Sum Modelling Inc, while pursuing legal studies at NMIMS School of Law, Mumbai. Dr Badri Narayanan is the founding director of Infinite Sum Modelling (ISM), Seattle and a senior economist with University of Washington, Seattle.