A cryptocurrency can be defined as a decentralised digital asset and a medium of exchange based on blockchain technology.
Latest updates – Clarification on proposed Section 115BBH in Budget 2022
1. Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.
2. Infrastructure cost incurred on mining crypto assets will not be treated as cost of acquisition.
Union Budget 2022 Outcome:
1. Income from transfer of virtual digital assets such as crypto, NFTs will be taxed at 30%.
2. No deduction, except the cost of acquisition, will be allowed while reporting income from transfer of digital assets.
3. Loss from digital assets cannot be set-off against any other income.
4. Gifting of digital assets will attract tax in the hands of receiver.Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.
In layman language, cryptocurrencies are digital currencies designed to buy goods and services, similar to our other used currencies. However, since the beginning, it has largely been controversial due to its decentralised nature, meaning its operation without any intermediary like banks, financial institutions, or central authorities.
Today, more than 1,500 virtual currencies, such as Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic, etc., are traded in the digital currency world. The investment and trading volume of cryptocurrencies has increased multifold since the nationwide lockdown. The crypto investments have grown despite any precise regulation from the Indian Government or Reserve Bank of India.
So far, the Indian government has not yet granted any status of legal tender to cryptocurrencies.
In 2018, RBI tried to impose a ban by restricting banking facilities to the crypto exchanges. However, the ban was ruled out by the Supreme Court on constitutional grounds and virtual exchanges fundamental rights.
The income tax department has not yet offered any clarification regarding the tax implications on the gains earned from the crypto transactions.
Tax experts have been contemplating the classification of the cryptocurrency between ‘currency’ or an ‘asset’. Cryptocurrency and crypto-assets are the names largely used interchangeably.
However, classifying it as a ‘currency’ needs some legal backing from the government, in the absence of which it is safe to classify it as an ‘asset/property’.
Since the tax implication would arise irrespective of the legality status, classifying them as ‘assets’ would be a better approach than any government clarification.
Further, the U.S government had also issued a notification classifying it as a ‘property’ and thereby levying capital gain taxes on the gain on sale of the cryptocurrencies.
Since the cryptocurrency is not yet legalised by the Reserve Bank of India (RBI), it cannot escape from taxability. An investor earning profits from the sale of cryptocurrency must pay income tax.
All incomes, except exempted explicitly by the Income Tax Act, are subject to tax. Till we receive any clarification from the income tax department, investors must pay income tax on the crypto-transactions based on the nature of the transactions.
As per the standard income tax rules, the gains on the crypto-transactions would become taxable as (i) Business income or (ii) Capital gains. This classification will depend on the investors’ intention and nature of these transactions.
If there are frequent trades and high volumes, gains from the cryptocurrency transactions will be taxed as ‘business income’.
However, they will be taxed as ‘capital gains’ if the purpose of owning them is primarily to benefit from longer-term appreciation in value with fewer trades.
The nature of classification has to be reviewed for every taxpayer, and taxpayers must take the help of an expert for accurate reporting.
If the crypto-transactions are classified as ‘investments’, they will be considered capital gains or losses under the head ‘capital gain’.
If the sale value of the transaction is more than the cost, it will be regarded as ‘capital gain’, and if the price is higher than the sale value, it will be considered ‘capital losses’.
As per the applicable income tax slabs, short-term capital gains tax will be leviable if crypto assets are held for less than three years (<=36 months). If the crypto-assets are sold after holding the investment for three years (> 36 months), they will be treated as long-term investments and taxed at 20% with indexation benefit.
There is no directive from the income tax authorities regarding the treatment of capital losses. However, if your sale transaction has resulted in a loss, we suggest you consult an expert.
If crypto transactions are reported as business income, the implication of Goods and Services Tax (GST law) also needs to be examined. All the direct and indirect expenses will be allowed as deductions from the profits on the sale of the crypto assets. The profits will be added to the other income and taxed as per the income tax slab rates.
The taxable event for GST implication is the supply of goods or services or both. The concept of supply is an inclusive one, and it covers a large number of transactions.
‘Services’ is defined as anything other than goods, securities and money. It includes activities related to using money or its conversion by cash or any other mode for which a separate consideration is charged.
Considering the above definition, GST may become applicable on the buying and selling of cryptocurrencies as the supply of goods or services.
The Central Economic Intelligence Bureau (CEIB) has proposed categorising cryptocurrencies as intangible assets and applying GST on all the crypto transactions. Since the government has not yet defined its taxability and the proposal is under discussion, a general rate of 18% may likely become applicable going forward.
If your turnover has exceeded Rs 20 lakh, you may have to consider paying GST on your turnover; please get in touch with an expert on this matter.
Crypto-assets can also be reported as ‘income from other sources’ while filing ITR and taxed accordingly. Income from other sources is also added to the total income and taxable as per the applicable tax slab of the taxpayer.
Also, there are views to treat the income from crypto assets as ‘speculation business income’ and taxed as per the highest tax slab. However, till any clarification is received from the income tax department, the taxpayers can benefit from classifying it as capital gains or ordinary business income.
Even though no clarification has been received from the income tax department, it is essential to report the gains in the ITR and pay taxes on the gains.
Ministry of Corporate Affairs (MCA) mandatory compliance in disclosing gains and losses in virtual currencies. Also, the value of cryptocurrency as on the balance sheet date is to be reported. Accordingly, changes have been made in schedule III of the Companies Act starting from 1 April 2021. This mandate can be considered as the first move of the government towards regulating cryptocurrencies.
Please note that this mandate is only for companies, and no such compliance is required from the individual taxpayers. However, reporting and paying taxes on the gains on cryptocurrency is a must for all.