Cryptocurrency Dilemma: How to show crypto earnings in ITR?

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December 14, 2020 4:50 PM

There is confusion among many on how the earnings from investments in cryptocurrencies should be disclosed in the ITR as there is no clarity on it.

income tax, income tax return, ITR, cryptocurrency, crypto earnings, income from investment in cryptocurrencyThe lack of clarification about the taxation on crypto earnings may result into disputes.

As per the provisions of the Income Tax Act, an assessee – having annual income of more than Rs 2.5 lakh or who has received any payment on which tax was deducted at source (TDS) – needs to file Income Tax Return (ITR), disclosing all the earnings.

However, there is confusion among many on how the earnings from investments in cryptocurrencies should be disclosed in the ITR as there is no clarity on it.

“In India the cryptocurrency sector is in a very nascent stage. A lot in terms of regulations and taxation needs to be done. Cryptocurrency earnings ought to be taxed as a short or long-term capital gain based on the duration they were held as an investment,” said Kumar Gaurav, CEO and Founder, Cashaa.

In fact, the Reserve Bank of India (RBI) had banned holding or trading cryptocurrencies in India. The RBI ruling, however, was set aside last year by the Supreme Court, paving way for investments in cryptocurrencies in India.

But due to the confusion, the nature of earnings from investments in cryptocurrencies has not been defined yet. So, there is no clarity on taxation of such earnings.

“Tax implication on any profit or gain arising from holding Crypto Currencies will depend on its nature whether it is a currency or property. Generally crypto currencies are used for exchange of goods or services. Currently in India, crypto currencies are not recognised by RBI as a currency and similarly income tax law also does not define it as a currency. So, crypto currencies cannot be regarded as currency neither an India currency nor foreign currency. Therefore, for the purpose of income tax it will be regarded as property and tax implication will be similar if one is holding any other property. In other words the profit or gains arising from crypto currencies either can be taxed as business profit if the same is acquired with the intention to make profit by trading/mining or capital gain if the same is acquired with the intention to create wealth,” said Gopal Bohra, Partner, NA Shah Associates.

“In absence of any clarity the tax implications are discussed based on the existing tax law, however, specific clarifications are required from the tax department. In ITR form disclosure of the profit or gain arising from crypto currency transactions need to be disclosed on the basis of the position taken by the taxpayer i.e. whether capital gain or business profit,” Bohra added.

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However, it won’t be proper to not disclose the earnings from crypto investments, simply because there is no clarity on taxation.

“While cryptocurrencies have not been categorised under any tax bracket, so far. But the Income Tax Department can monitor earnings of cryptocurrency investors that are registered through KYC/AML compliant exchanges, with the help of PAN,” said Sumit Gupta, CEO and co-founder of CoinDCX.

“The amount of earnings generated by investing in cryptocurrencies may be highlighted under ‘Income from Other Sources’,” opined Gupta.

“The fact that earnings from cryptocurrencies is being considered as a taxable income is a positive indication as it also implies Crypto is being considered as a potential asset class,” he added.

The lack of clarification about the taxation on crypto earnings, however, may result into disputes.

“The taxation of crypto currency is a contentious issue and would definitely be prone to litigation. As on date, the Income Tax Act does not deal with taxation of crypto currency explicitly. In this backdrop, based on the available guidelines in determining the nature of income, the common perception is that crypto gains are speculative incomes and shall be disclosed under the income under the head profits and gains of business or profession,” said Divakar Vijayasarathy, Founder & Managing Partner, DVS Advisors LLP.

“However, those who have transacted minimally and have held crypto currency for longer duration, may disclose the income under the head income from other sources, in order to avoid litigation. Disclosing the same under capital gains shall be prone to litigation since the term “property”, under the definition of capital asset, is not defined and considering the same as capital asset is contentious however we feel that they should be treated at par with other listed securities. The taxation of crypto currency, at present, is a blind spot with different possibilities until the government clarified its stand unequivocally,” Vijayasarathy added.

So, it’s better to consult your tax advisor before you disclose your crypto earnings on return of income.

“Any earnings you make from crypto trading are taxable like any other income and should be declared in the IT returns. However, we advise our users to consult with the experts like Chartered Accountants on how to declare these earnings in ITR. I also believe that crypto regulation will bring more clarity to this as we’ll understand how crypto is classified, and taxed in India,” said Nischal Shetty, CEO, WazirX.

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