Taxation of Cryptos - Explained

The Indian government has yet to provide cryptocurrencies the status of legal money.

RBI attempted to enforce a ban in 2018 by restricting banking services to crypto exchanges. The restriction, however, was overturned by the Supreme Court, which concluded that virtual trades violate basic rights.

The income tax authorities have not yet provide any explanation on the tax consequences of gains derived from crypto transactions.

Tax experts have been debating whether cryptocurrencies should be classified as a 'currency' or a 'asset.' The terms cryptocurrency and crypto-assets are often used interchangeably.

However, identifying it as a 'currency' requires government legal support; in the absence of this, it is safe to categorise it as a 'asset/property.'

Because the tax implications would emerge regardless of legality, designating them as "assets" would be a preferable method than waiting for a government explanation.

Because the Reserve Bank of India (RBI) has not yet legalised bitcoin, it is subject to taxation. An investor who makes money by selling bitcoin must pay income tax.

All income is taxed unless it is specifically exempted by the Income Tax Act. Investors must pay income tax on crypto-transactions based on the nature of the transactions until we obtain clarity from the income tax department.

Gains on crypto-transactions would be taxed as I Business income or (ii) Capital gains under regular income tax regulations. The goal of the investors and the nature of the transactions will determine this categorization.

Gains from bitcoin transactions will be taxed as 'business income' if there are frequent exchanges and significant volumes.

They will, however, be taxed as 'capital gains' if the primary objective of owning them is to profit from longer-term value appreciation with fewer trades.

Every taxpayer must assess the nature of categorization, and taxpayers must seek the advice of an expert to ensure appropriate reporting.

If the crypto-transactions are classed as 'investments,' they will be treated as capital gains or losses under the heading 'capital gain.'

If the transaction's selling value exceeds the cost, it is deemed a 'capital gain,' whereas if the price exceeds the sale value, it is considered a 'capital loss.'

Short-term capital gains tax will be imposed if crypto assets are kept for less than three years (=36 months) under the appropriate income tax slabs. If crypto-assets are sold after three years (> 36 months), they will be classified as long-term investments and subject to a 20% tax rate with indexation advantage.