Crypto Taxation Explained: How are Bitcoins Taxed in India?

Crypto Alert! Govt Announces Taxes On Gains From Bitcoin

3 Min Read |  May 28, 2021

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Hey Convey Warriors! 

Cryptocurrency is all the rage right now. With Elon Musk’s tweets on bitcoin and dogecoin, and the steep price rise, all eyes are on crypto. New investors are being drawn into this new market, hoping to partake in the crypto fever.

Now that bitcoin is generating profits for its investors, some of the other technicalities come into play. We all know we have to pay tax on capital gains. Earlier, this used to include shares, bonds, mutual funds and other conventional instruments. 

Is bitcoin going to be added to that list?

Will we have to pay tax on gains from bitcoin investments?

If yes, then how much?

Read on to find out everything you need to know about crypto taxation.

Background

The Central Board of Direct Taxes (CBDT) has already announced that individuals making money out of bitcoin must declare and pay the relevant tax. 

Let’s see what the experts have to say.

According to ClearTax founder Archit Gupta,

Gain from the sale of bitcoin may be taxed as business income if traded frequently or taxed as capital gains if held for the purpose of investment. If regarded as business income, then the gains would be taxed as per the applicable slab rate.

Most amateurs dabbling in cryptocurrency, like you and me, will fall into the investors’ category.

Thus, for investors in bitcoin, taxation may be similar to that of capital gains.

The department is all prepared to issue legal notices to those who refuse to comply with the rules. The government is still inclined to make cryptocurrency completely illegal. 

According to Anurag Thakur, Minister of State for Finance,

Irrespective of the nature of business, the total income for taxation shall include all income from whatever source. The gains arising from the transfer of cryptocurrencies/assets are liable to tax under ahead of income. Supply of any service, if not specifically exempted, is taxable under GST and no service related to cryptocurrency exchange has been exempted.

Even if bitcoin may not be banned altogether, the government is planning to appoint some kind of regulator and set tax rate slabs. 

So, how much tax will you actually have to pay?

What is the tax slab?

Is there any way to avoid paying tax on bitcoin investments?

Keep reading for the answers!

Cryptocurrency Taxation India: Decoded

According to the Income Tax Act, 1961, a capital asset is referred to as a property held by a person. Based on this definition, cryptocurrency can also be considered a capital asset. 

Therefore, crypto gains and losses can be considered capital gains or losses.

Just like intra-day trading of stock, futures, or option, the frequent trading of bitcoins or any other cryptos shall be taxable as a business income. Both long term and short term capital crypto gains will fall under prevailing tax rates.

Crypto losses will be treated in the same manner.

Also Read:

How are Bitcoins Taxed in India?

You must be worried about the tax rate on cryptocurrency. After all, the worst part about tax is the amount you have to pay.

Here’s what you need to know. 

The government has declared that gains from crypto trading will be under GST purview. 

Although the government hasn’t yet brought the tax structure of bitcoins, the possibility of a bitcoin tax is high. After all, if there is a new golden duck in the house, everyone will try to get their hands on a golden egg, even the government. 

Income tax on bitcoin India 2021 can be implemented under the following heads.

Bitcoin Mining

Bitcoins derived from mining are known as self-generated capital assets. The sale of bitcoins might give rise to capital gains. But, the acquisition cost can’t be determined as it’s a self-generated asset. 

Moreover, it doesn’t lie under the purview of Section 55 of the Income Tax Act, 1961, which particularly defines the acquisition cost of certain self-generated assets. Following the Supreme Court Decision in the case of B.C. Srinivasa Shetty, the capital gains computation mechanism, fails. 

Therefore, there is no capital gains tax on bitcoin mining.

Bitcoins Held as Stock-in-trade and Transferred for Real Currency

If your income source is solely dependent on the bitcoin trading activity, it will give rise to income from business. Such gains will be taxable based on existing slab rates.

So, the answer to the question “Do I have to pay tax on Crypto gains?” is yes.

Bitcoins Held as Investments and Exchanged for Real Currency

If you hold bitcoins as an investment and exchange them for currency, you will be taxed on the capital gains. Depending on the holding period, you’ll be eligible for the short-term or long-term rate. 

Short term gains are taxed at the individual slab rate, and long term gains are taxed at a flat rate of 20%. The acquisition cost for arriving at long term capital gains will be decided based on the benefit of indexation. 

Let us understand this with an example given below:

Cryptocurrency Tax in India

Recapitulating the IT authorities’ contradictory view in case 1 above,  the IT authorities may not consider Bitcoins as a capital asset. Therefore, the provisions of capital gains won’t apply here. 

On the other hand, if the IT authority chooses to tax the gain under “income from the other sources”, you will get a rate applicable under your tax slab. 

I hope you are understanding how to pay tax on cryptocurrency in India. Keep reading till the end. 

Bitcoins Received for Sale of Goods & Services

In such cases, the bitcoins will be treated as money. It will be counted as income and you will be taxed accordingly.

Corporate Dealings in Cryptocurrency

In March 2021, the Indian government introduced new cryptocurrency guidelines for Indian companies. Accordingly, all Indian companies dealing with crypto must report all their transactions and holdings while filing income tax returns.

Conclusion

This article focuses only on the taxability of bitcoins. The taxes on other cryptocurrencies will be of a similar nature.

For a better understanding of cryptocurrencies, go through our other blogs on bitcoins, dogecoins, etc. Reading one blog isn’t enough. If you are really looking for knowledge, explore our blog section. 

If you loved reading this piece of content, do share it with others as well. Let us together make India financially aware!


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