In India, cryptocurrency is gaining popularity as an investment and, increasingly, as a means of payment by businesses for their goods and services. This raises the question of how to pay taxes on such transactions.
While the Reserve Bank of India (RBI) has not granted bitcoin and other cryptocurrencies legal tender status, there is no way to avoid paying tax on cryptocurrency investment gains. The Indian government intends to categorize virtual currencies and their tax treatment based on their intended use—payments, investment, or utility.
“Cryptocurrency gains could occur through a variety of methods, including mining, staking, farming, or traditional buying and selling,” said Edul Patel, co-founder and CEO of San Francisco-based cryptocurrency trading platform Mudrex. Gains from trading digital assets could be classified as ‘business income,’ whereas other activities would most likely be classified as ‘income from other sources.’ Adding new rules or amending existing ones would burden taxpayers unnecessarily, according to Patel.
High-powered computers ‘mine’ bitcoin by solving complex mathematical puzzles in exchange for a bitcoin reward. Similarly, cryptocurrency staking offers a token reward for determining whether or not a transaction satisfies certain protocol requirements. Yield farming, which is common in the ethereum ecosystem, entails lending out crypto assets in exchange for a payment.
While it is unclear whether the Indian government will establish a regulatory framework for virtual assets, it has made provisions for transparency.
The Indian government made it mandatory for companies dealing with virtual currencies to disclose their profit or loss on crypto transactions, as well as the amount of cryptocurrency they hold on their balance sheets, in March. The amendments to the Companies Act went into effect on April 1st of this year.
Anurag Singh Thakur, the then-minister of state for finance, clarified that “the gains resulting from the transfer of cryptocurrencies/assets are subject to tax under the head of income, depending on the nature of the holding of the same.”
The key point is to evaluate the nature of these investments.
Cryptocurrency can be classified as an investment asset or a source of revenue for a business.
If a digital token is purchased for investment purposes, it is considered a capital asset and must be taxed under capital gains. Depending on the holding period, these investments are classified as long-term or short-term capital gains.
Gains accrued after holding a cryptocurrency for 36 months or more are taxable as long-term capital gains, while gains accrued during a shorter period are classified as short-term capital gains. According to Harsh Bhuta, partner at accounting firm Bhuta Shah & Co, these gains are taxed at the applicable slab rates, whereas long-term capital gains are taxed at a flat rate of 20% with the benefit of indexation. According to Bhuta, “much clarity” is still needed on how to treat various types of gains and income.
Once the indexation benefit is applied, the tax rate under the long-term category can decrease, allowing the investor to adjust for inflation during the period these investments were held. The Central Board of Direct Taxes publishes the cost inflation on which these assessments are based each year.
However, if a trader frequently conducts cryptocurrency transactions, any profits generated are taxable as business income.
The cryptocurrency bill in India may necessitate more transparency.
Many countries already have a taxation system in place for cryptocurrency gains, but India’s icy attitude toward the virtual currency ecosystem makes it difficult for investors to file their tax returns. According to blockchain data firm Chainalysis, Indians had nearly $6.6 billion (Rs49,189 crore) in cryptocurrencies as of May this year, compared to around $923 million until April 2020.
As cryptocurrency regulations in India remain ambiguous, an increasing number of Indians are gaining access to digital tokens by purchasing and selling on foreign platforms, which may offer better features and customer service. However, if Indian authorities warm to the crypto token market, some of that business may return to domestic crypto exchanges.
According to July reports, the Indian government may levy the 18 percent Goods and Services Tax (GST) on transactions on foreign cryptocurrency exchanges in order to level the playing field with domestic ones. A 2% equalisation levy on transactions with foreign crypto exchanges is also being considered by India, according to reports. The 18 percent GST is charged as a trading fee to customers by Indian cryptocurrency exchanges, which is similar to the setup for stock brokerages.
Market participants are now clenching their teeth in anticipation of the Indian parliament’s winter session, when the country’s first cryptocurrency legislation is expected to be introduced. The Cryptocurrency and Regulation of Official Digital Currency Bill is expected to include disclosure requirements for Indian residents’ income tax returns for crypto holdings in India as well as foreign crypto exchanges.
The government may be able to regulate cryptocurrency transactions as a result of this, and the legitimacy provided by digital tokens may give investors more confidence in the sector. Many cryptocurrency supporters believe that regulating cryptocurrency will also generate tax revenue for the Indian government. According to Bhuta, the Indian government may introduce special income tax rates to tax profits from cryptocurrency transactions, and such transactions may only be identified through recognized platforms.
“It would be a massive source of revenue for the government, which is currently burdened with a large fiscal deficit,” Patel said. “The government recognizes the value of job opportunities in the numerous new startups that have sprouted up around the crypto ecosystem. The government should most likely concentrate on developing a strong taxation framework that is simple to understand and implement.”