Guide to Taxation of Crypto Currencies in India

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In India, cryptocurrencies have become a rage. The country is said to have the second-highest adoption rate.

The spurt has caught the government’s attention, and according to media reports, the government is mulling taxing blockchain ecosystems, which include cryptocurrencies and non-fungible tokens (NFTs).

Currently, there are no specific guidelines regarding the taxation of Crypto Currencies in India. However, one can follow the general guidance available for all classes of Assets under Income Tax Act, 1969.

Income tax in India is charged under Five heads namely –

  • Income from Salary
  • Income from House Property
  • Income from PGBP
  • Income from Capital gains
  • Income from Other sources

Now the question under consideration is How is Cryptocurrency taxed?

Possible sources of earning gains through Cryptocurrency –

Cryptocurrency can be directly purchased by considering it as an investment through Crypto apps such as Coinswitch etc. And same as stocks there may be some entities involved in a series of buying and selling transactions considering it as a business. Cryptocurrency can also be earned through mining. , Most of us are aware of the first two methods, and hence let us understand what Crypto mining means.

As per techopedia – “ Cryptomining is the process of validating a cryptocurrency transaction. Cryptocurrencies like Bitcoin use distributed public ledgers to record all financial transactions. Each transaction is linked to the previous and subsequent transactions, which creates a chain of time-stamped records called a blockchain ”

Because the distributed ledger is public, each record needs to be validated in order to prevent fraudulent transactions. Validation involves solving a complex mathematical problem that is difficult to solve, but easy to verify.

A network of computers called cryptominers compete to solve the problem first. The computer (miner) that solves the problem first earns the right to post the transaction to the ledger and gets a financial reward, which is typically paid in cryptocurrency.

Although anyone can become a miner, the cost of the hardware and energy required to be competitive and solve complex mathematical problems first can be a big barrier to entry.

Cryptocurrency may be taxed under any of the three heads – PGBP, Capital Gains, or Other sources depending on the nature of the transaction.

Now we will try to understand the taxation under each case.

Capital Gain –

For any asset to be taxed under Capital Gain, it needs to satisfy certain criteria as laid down under Income Tax Act. Firstly it should be a capital asset as defined under the act and there should be a transfer of such capital asset. Now rather than going into each definition and making it complex, we will try to make it simple. Any kind of Property is Capital Asset(Movable/Immovable/Tangible/Intangible etc)

And hence Crypto being Intangible Property is a Capital Asset. The second trigger for charging tax under capital gain is Transfer. Income tax act defines transfer in an inclusive manner by including all the possible transactions such as sale, exchange, extinguishment of right etc. And hence the sale of crypto gets squarely covered under Transfer.

So unless a person is engaged in the business of selling and buying crypto on daily basis, Gain on the sale of crypto is taxed under Capital Gains. So, 90% of the buyers and sellers are covered under this category. To know the rate at which the gain is charged, we need to understand the concept of holding period under the Income-tax act.  The amount of tax charged on an Asset depends on the period it is held. As the government wants to encourage holding assets for a long period (to avoid speculation etc), Assets held for long period are taxed at low rates and vice-versa.

Holding Period –

Now the question is what is Long term ? The income tax act defines a certain period for each category of assets to consider it as long term. For example Shares can be said as long term if they are held for 12 months or more. And it is 24 months in case of property/land. There exists a residual category that specifies a period of 36 months. As holding period of Crypto currency is not specifically defined in the act , we can consider 36 months to consider as long term.

Rate of Tax –

If crypto currency is held for more than 36 months – 20% on gain (with indexation benefit- explained below)

Other cases                                                                       – Normal rates of tax (explained below)

Indexation –

To understand indexation let us take an example. Mr A purchases an Asset at Rs 1,00,000 today and he sells the same at 1,06,000 a year later. The absolute gain of Mr. A is Rs 6,000. Considering an inflation rate of 6%, the net gain of Mr A is nil. And hence considering this, Indexation was introduced.

Even though the original cost of Share purchased by Mr A is 1,00,000. For income tax purposes it is considered as 1,06,000, thereby resulting to no gain/loss and no tax is payable in such transaction. Hence in such cases tax is only payable if Mr A sells the Asset above 1,06,000.

Note: Inflation rates released by the government are not considered for Income tax calculation. The income tax Board releases separate rates for tax purposes.

Normal Rates of tax –

Income Tax Slab

 

Tax Rates As Per New Regime

Tax Rates As Per Old Regime

₹0 – ₹2,50,000

Nil

Nil

₹2,50,001 – ₹ 5,00,000

5%

5%

₹5,00,001 – ₹ 7,50,000

₹12500 + 10% of total income exceeding ₹5,00,000

₹12500 + 20% of total income exceeding ₹5,00,000

₹7,50,001 – ₹ 10,00,000

₹37500 + 15% of total income exceeding ₹7,50,000

₹62500 + 20% of total income exceeding ₹7,50,000

₹10,00,001 – ₹12,50,000

₹75000 + 20% of total income exceeding ₹10,00,000

₹112500 + 30% of total income exceeding ₹10,00,000

₹12,50,001 – ₹15,00,000

₹125000 + 25% of total income exceeding ₹12,50,000

₹187500 + 30% of total income exceeding ₹12,50,000

Above ₹ 15,00,000

₹187500 + 30% of total income exceeding ₹15,00,000

₹262500 + 30% of total income exceeding ₹15,00,000

Add your salary income to the amount earned on cryptocurrency to know the rate at which Crypto is charged.

On the basis of above, one can conclude that –

  • If your income other than gain on crypto is less than 5 lakhs – Gain on cryptocurrency is taxed at 5% till reaching 5lakh limit on aggregate (Other income + Gain on crypto) and then at a rate of 20% till 10 lakh and 30% theron
  • If your income other than gain on crypto is more than 5 lakhs – Gain on cryptocurrency is taxed at 20% till reaching 10 lakh limit on aggregate (Other income + Gain on crytpo) and then at a rate of 30% on the balance amount.

If your income is above 50 lakhs, Surcharge is charged over and above the abovementioned tax.

INCOME and Tax Calculator

Other common FAQ –

  • Whether any tax is deducted at source on sale of crypto?

No, there are no such provisions that prescribe deduction of tax at source

  • Is it mandatory to file an income tax return if I invest in crypto?

No, Income tax return is only mandatory if Total Income (incl gain on crypto) is above 2.5 lakhs

  • I am a salaried employee and I invested nominal amount in Bitcoin. Is it mandatory to show it in Income tax return?

No, Reporting in the income tax return is only required if –

  • Total income exceeds 5 lakhs
  • Such asset is sold in the respective year
  • I am a salaried employee and I earned bitcoin through promotional offers. Is tax levied on such a receipt?

Yes, subject to a limit of 50,000 in a year. (This limit of over and above 5,00,000 in aggregate)

  • I received bitcoin as a gift from my friend. And I sold it after holding it for a period of one year. Is it taxable? If yes, at what rate?

In the above question, tax arises under two instances – At the time of the gift and the time of sale.

At the time of gift – Subject to a limit of 50,000 (This limit of over and above 5,00,000 in aggregate)

At the time of Sale – Cost of Bitcoin for calculation of profit is the cost of your friend’s purchase and indexation is also applicable from such date.

  • I am a Non-Resident . Will I have any benefit in taxation of gain on Crytpo currency?

No, there is no specific benefit available to Non Residents. However if Non resident invests in foreign currency  then Indexation is not applicable and capital gain is to be computed as per specified rules.

  • Is there any exemption on sale of crypto currency?

No, exemption of Rs 1,00,000 is available on sale of Equity shares of listed company after 1 year from the date of purchase.

  • Can I make passive income by investing in Crypto and what is its taxation?

The only possible gain on Cryptocurrency is its appreciation in value. No passive income can be earned through holding crypto and hence taxation is not relevant.

  • Is there any limit on holding crypto as per Income tax rules?

There is no limit for tax purposes for holding cryptocurrencies

  • I have a loss of Rs 1,00,000 in the previous year in Crytpo currencies. Will there be any tax benefit for me?

As per Income tax rules, Loss can be carried forward for 8 years, and then the same can be set off with gain in future years

  • Can loss in crypto reduce TDS on my Salary Income?

Loss under the head capital gain cannot be set off with gain under any other head.

  • Can loss in crypto be set off with gain in shares and vice versa?

Yes. Long-term capital loss can be set off only with a long-term capital gain. Short-term capital gain can be set off with either long-term capital gain/short term capital gain.

Profit & Gain from Business & Profession –

Gain on sale of Cryptocurrency is taxed under PGBP if it is the main business of the Assesse (i.e series of purchase and sale transactions). Expenses in the course of business can be claimed against such gain. It is taxed at normal rates of tax. Assesse can also avail the option of Presumptive taxation i.e Paying tax at normal rates on 6% on turnover irrespective of gain. Normal rates of tax applicable for Individuals are discussed under Capital Gain heading above.

Crytpo Mining –

In the case of Crypto mining, the Assets are earned as a financial reward and hence the cost cannot be directly ascertained. As per judicial pronouncements, the cost of Self generated goodwill is Nil. And Assets other than Goodwill are not chargeable to Tax. And hence crypto earned through Mining is not chargeable to tax in India.

Anil Kumar Tenneti

Editor, Tax Concept & TC VIP. Chartered Accountant II Stock Market Enthusiast. I write articles related to market, taxation, Company law and MSME.

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