Warren Buffet, the greatest investor of all times, once junked bitcoins and in fact called them ‘rat poison squared’. Not many investors heed to this advice though; cryptocurrencies have generated a lot of interest for investors of all ages due to recent increase in value. It is estimated that roughly a crore Indians have invested in cryptocurrencies, reports suggest.
Are gains from cryptocurrencies taxable?
Tax authorities around the world have been working to carve out rules of taxation for cryptocurrencies. Even though cryptocurrencies are not mentioned in the Indian income tax act and there are no rules defined yet, you must report them in your income tax return and pay tax on them.
An asset or a currency?
When we talk about taxation a bunch of questions arise. Should cryptocurrencies be considered currency or a digital asset? If considered to be an asset, what should be the holding period of these assets for them to be classified between long term or short term capital assets? Since cryptocurrencies are not yet widely accepted the way other currencies are, they are now being regarded as ‘digital assets’ in several countries. Note that currently, India does not have a rule around how these cryptocurrencies should be taxed.
Should they be treated as capital assets in India?
Countries such as the UK and USA have laid down that cryptocurrencies should be treated like capital assets. The definition of capital assets in the Indian income tax act is a more inclusive one and will therefore cover assets which may not be separately defined. Such assets may be treated as long term assets when held for a period exceeding three years and short term assets when held for less than 3 years time period. It may be reasonable to allow indexation @ 20% for the cost of acquisition. When it comes to the rate of taxation, we may choose to tax them at a rate of 20% (additional cess and surcharge as applicable). Short term capital gains may be taxed at slab rates applicable to the taxpayer. Do note that so far no specific guidance is available under the income tax act for taxation of crypto assets.
Can frequent crypto trading be classified as a business activity?
If a taxpayer has a significant volume of transactions and does not intend to hold these assets for the longer term, a question arises as to whether such an activity should be considered as a business. This has to be evaluated on a case to case basis. Considering crypto trading as a business activity involves reporting and claiming expenses involved in such an activity. If the turnover crosses a specified threshold, a doubt regarding GST applicability may arise. Some of these issues are not yet addressed by the tax authorities. Another aspect that needs to be clarified is whether loss from sale of crypto assets can be set off or carried forward.
What should you do?
Firstly, you must ensure that you are maintaining proper records of all your transactions. Secondly, always keep in mind that these assets are unregulated in India and therefore there is high potential risk in owning or trading in them. However, you must pay taxes if you have earned an income. Seek the help of an expert who can guide you through. If you are a miner, you may have created a self generated asset. Miners also spend a lot of time and money to build these assets and therefore taxation may be a completely different ballgame in their case.
Archit Gupta is founder and CEO, ClearTax. Views are his own.
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