Holding crypto assets in India? Here’s how you are going to pay income tax on it

Find out how USA and UK are taxing Crypto Gains and find out how the Indian Government is planning to tax Crypto Gains.

Income tax on crypto in India?

The circular issued by the Reserve Bank of India on 6th April 2018, which restricted banking facilities from being offered to participants involved in cryptocurrency transactions, has been the first step in regulatory challenges posed to cryptocurrencies in India. This decision has, however, been squashed recently, when the Reserve Bank of India clarified that “its 2018 order directing lenders to stop dealing in virtual currencies was quashed by the Supreme Court in March last year and can’t be cited by banks to deny services to people dealing in cryptocurrencies”.

This has enabled a breath of fresh air for cryptocurrency traders in India. What about cryptocurrency taxation, however?

According to Economic Times India, the Indian income tax law is currently unclear when it comes to the tax impact on the gains earned from cryptocurrencies. If treated as a property, it may be taxed under Capital gains and if not, maybe treated as Other sources. In such conditions, our regulators may look at other countries that have already recognized cryptocurrencies for guidance.

USA: Cryptocurrencies are classified as “property”, meaning they are to be taxed as capital assets in all situations other than those related to mining activities.

UK: Subject to capital gains tax, If a person buys and sells crypto-assets “with such frequency, level of organization and sophistication that the activity amounts to a financial trade”.

The gov.uk guide to paying tax on crypto assets in the UK explains this issue in detail. This could serve as a good example of how this issue could be resolved in India.

According to the guide,

“You might need to pay Capital Gains Tax when you:

  • sell your tokens
  • exchange your tokens for a different type of crypto asset
  • use your tokens to pay for goods or services
  • give away your tokens to another person (unless it’s a gift to your spouse or civil partner)
  • If you donate tokens to charity, you may need to pay Capital Gains Tax on them.

To check if you need to pay Capital Gains Tax, you need to work out your gain for each transaction you make. The way you work out your gain is different if you sell tokens within 30 days of buying them. Your gain is normally the difference between what you paid for an asset and what you sold it for. If the asset accrues to you free of cost, you may have to pay tax on the fair value of the asset (generally price at an exchange where the highest number of trades happen) as on the date of accrual under other sources and such fair value becomes the cost of acquisition.

You do not need to pay Capital Gains Tax on the value of the tokens that you’ve already paid Income Tax on. You’ll still need to pay Capital Gains Tax on the gain you make after you’ve received them.

You can deduct certain allowable costs relating to the sale or disposal of cryptocurrency like brokerage or commission, including a proportion of the pooled cost of your tokens when working out your gain.

If we take a hint from the UK laws and existing Indian tax laws, the basic exemption limit may be extended to capital gains on cryptocurrencies as well.

The fact that cryptocurrency gains will be taxed is now clear with the Minister of State for Finance, Mr. Anurag Singh Thakur stating on 28th March 2021 that “the gains resulting from the transfer of cryptocurrencies/assets are subject to tax under ahead of income, depending upon the nature of holding of the same”.

The main issue to resolve now is: will the income from crypto assets be treated as capital gains or business income?

According to Section 2(14) of the Indian Tax Code, a capital asset means “a property of any kind held by a person, whether or not connected with his business or profession”. Any gain which comes as a consequence of the transfer of cryptocurrency may be considered as capital gains if it is held for investment.

There is also an issue of whether these would be qualified as short or long-term capital gains.

Most likely, if investors hold cryptocurrencies for 12 months or more (most probably, this might be equated to listed securities), the gains would be taxable as long-term capital gains, and if less than 12 months, it would be short-term capital gains. The first kind is taxed at the flat rate of 20% with the benefit of indexation, the second is taxable as per the slab rates applicable to a taxpayer.

If the transactions of a person are substantial and frequent, he or she could be classified as a trader in cryptocurrencies, and thus the profits would be taxed as business income.

In this area, their clarity is still needed in terms of “classification as speculative income, allowability of set-off, and carry-forward of losses, and applicability of deemed gift tax provisions”.

When in doubt, there are tools online which can help you calculate your tax liability, for instance, here.

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