Taxation of Cryptocurrency Gains in India
The world of virtual currencies is abuzz with activity and cryptocurrencies is one of the most discussed topics these days. Even though regulation on cryptocurrencies is not clear in India, it is not illegal to invest in them. Several early adopters are keen to explore it as an investment avenue and experiment with its functionalities. Names such as Bitcoin, Litecoin, Ethereum, Ripple etc. which would have seemed alien a couple of years back, are the new investment buzzwords. Even though one might want to invest out of curiosity in these instruments, one should be prudent about the tax implications on the profits earned from cryptocurrency trades.
Central Board of Direct Taxes (CBDT) has not yet introduced any regulation for transactions in cryptocurrencies. As per the General Indian Tax principle, all capital receipts are not taxable unless specified and all the revenue gains are taxable unless exempted. Going with this logic, there would definitely be a tax implication on profits/losses arising from currency trades. But the question here is under which head to these profits/losses. There are two ways these cryptocurrency transactions could be treated:
a. If one holds cryptocurrency as an investment, it would be treated as a Capital Asset. Thereby, the resulting profits/losses would go under “Capital Gains”, as in the US. If the period of holding such currency is less than 36 months, then it would result in short term capital gains, else long term. Short term gains are taxed as per the normal slab rates and long-term gains at 20% with indexation benefit.
b. If one is a frequent trader and its one business to earn profits out of trading, then it is to be treated under “Profits and Gains of Business or Profession” and will go as per slab rates.
There are no prescribed rules to decide whether one’s intention is of trading or investing; and it can be a bit confusing to conclude. This can be arrived at by looking at the volume, frequency and other income activities of the taxpayer.
On a safer side, one can treat it under “Income from other Sources” if total income for the financial year exceeds Rs.10Lacs. It will then be considered under the maximum tax rate of 30% and will avoid litigation at assessment level.
If one is making considerable amount of money from trading, one should keep all tax implications in mind as periodical advance tax would also need to be paid; else one could end up paying taxes with an additional levy of interest at the time of filing tax returns.