Income tax payment and ITR filing rules for earnings from cryptocurrency trading and investment 2021: Indians have invested billions of dollars in cryptocurrencies like Bitcoin, Dogecoin, Ethereum, Binance, Ripple, Matic, and other over popular coins. The trading volume of cryptocurrencies has increased multifold since the nationwide lockdown of last year.
According to a recent Bloomberg report, Indian investment in cryptocurrencies grew from $923 million in April 2020 to nearly $ 6.6 billion in May 2021. The crypto investment by Indians has grown despite no clear regulation on this from the RBI or the Government.
The RBI had tried to impose a kind of ban in 2018 by restricting banking facilities to crypto exchanges, which was later ruled out by the Supreme Court. Since then, the Indian engagement in crypto trading and investment has grown manifold, particularly after Covid-induced lockdowns confined salaried youths to their homes, leaving them with ample time to explore new ways of making money fast.
As the tax filing season for AY 2021-22 starts, many crypto investors in the country may be worried about the tax implications of their earnings from crypto-currency trading and investments in the previous financial year. Here’s an explainer for them:
The income tax department has not yet provided any clarification regarding the tax implications on the gains earned from the crypto transactions. Even though cryptocurrency is not yet legalised by the Reserve bank of India (RBI), it is not advisable to avoid paying income tax on its gains, according to Archit Gupta, Founder and CEO, Clear.
Gupta told FE Online, “all incomes, except which are specifically exempted by the Income Tax Act, are subject to tax. Hence the investors will be liable to pay income tax on the crypto-transactions basis on the nature of the transactions, even though the income tax department has not yet clarified the tax impact on these transactions.”
How to pay tax on crypto transactions?
As per the general income tax parlance, Gupta says the gains on the crypto-transactions would become taxable as business income or as capital gains, depending on the nature of these transactions and the investor’s intention.
“Profits from the crypto transactions will be taxed as ‘business income’ if the trades are frequent in nature and the volumes are high, else taxed as ‘capital gains’ if the purpose of owning them is primarily to benefit from longer-term holding via an appreciation in value and there are fewer trades or these are held as investments,” Gupta said while suggesting this has to be reviewed for every taxpayer and taxpayers must take the help of an expert.
If crypto transactions are reported as business income, the implication of GST law also needs to be examined.
According to the Income Tax Act, business income is taxed as per the income tax slab rates, and if held as ‘investments’, taxation will be similar to the capital gains.
Short-term or Long term gains?
Gupta further said that if the crypto-transactions are classified as ‘investments’, they will be liable to short-term capital gains tax if held for less than 36 months as per the applicable income tax slabs. However, if the crypto-assets are sold after holding the investment for three years, they can be treated as a long-term investment and taxed at 20 percent with indexation benefit.
Tax at highest slab?
There are some views to treat the income from crypto assets as ‘speculation business income’ and taxed as per the highest tax slab. However, Gupta said until any clarification is received from the income tax authorities, the taxpayers can benefit from classifying it as ordinary business income or capital gain.
According to Gupta, even though no clarification has been received from the income tax department, it is important to report the gains in the ITR and pay tax on the gains.