Cryptocurrency sales income can be treated as either capital gains or profits.
Due to reasons like the spectacular increase and drop of prices, the opinions of some high-net-worth people, and measures taken by various governments, cryptocurrencies have recently been in the limelight. Several Indians have invested in cryptocurrencies such as bitcoin, Ethereum, and dogecoin, attracted by the promise of huge profits. When completing their tax filing, such investors must be cautious. They must disclose the proceeds from the selling of cryptocurrencies in a timely manner. Let’s take a look at some of the intricacies of taxing revenue received through cryptocurrency transactions.
The Income Tax Act of 1961, as well as the Central Board of Direct Taxes, do not specify a specific tax treatment for income derived through cryptocurrency investments. Income gained from the sale of cryptocurrencies can be taxed as either capital gains income or profits/gains from a business or profession, according to the Act. Whether an individual holds bitcoin as an investment or a stock-in-trade determines the classification of income and the method by which it is computed.
Because the Indian regulatory system does not consider cryptocurrency to be legal money, it is likely to be classified as a financial asset, as it offers the holder exclusive access/spend rights. Unless explicitly excluded, every asset, interest, or right in a property is considered a capital asset under the Act. The definition of the capital asset does not expressly exclude cryptocurrency.
Capital gains is the main difference between the sale price, the cost of acquisition, and the costs of transferring cryptocurrency. The cost of acquisition consists of the price of the cryptocurrency plus the broker’s commission or wire transfer fee. Because cryptocurrencies are stored in an electronic wallet, they become fungible when purchased at different times and at different prices, making it difficult to determine which batch of purchase is being sold and the cost of acquisition. In this situation, the taxpayer must use the first-in-first-out approach to calculate the acquisition cost.
Capital gains are further divided into short-term and long-term gains, depending on how long an asset has been kept. Profits earned on cryptocurrency held for less than one year from the date of acquisition are considered short-term gains and are taxed at the applicable slab rates (15 percent), while profits held for more than three years are considered long-term gains and are taxed at the applicable slab rates (20 percent). Gains are subject to a favorable tax structure (top tax rate 28.49 percent ). In addition, the taxpayer is entitled to an indexation benefit on the acquisition cost. Each swap of one cryptocurrency for another will be treated as a transaction and will be subject to capital gains tax. Each such disposal will necessitate the taxpayer’s reporting and payment of taxes. Because of the recent drop in bitcoin prices, some investors may have lost money while selling cryptocurrency. Under present regulations, these losses can be offset against gains from the sale of other assets.
Income from business or profession:
Taxpayers who bet on short-term price changes or own cryptocurrencies as a stock-in-trade may be classified as traders. Whether a person qualifies as a trader or an investor is determined by factors such as frequency of buying and selling, holding time, and investing objective. Any revenue received through the selling of cryptocurrencies will be taxed as income from a company or profession if a taxpayer qualifies as a trader.
Taxpayers having an annual income of more than 37,15,070.00 Indian Rupee must declare their financial assets, as well as the cost of acquisition, on the Schedule for Assets and Liabilities. Because cryptocurrencies are also considered assets, taxpayers must list them in the Schedule.
Furthermore, individuals who qualify as citizens and ordinary residents must report their foreign income and assets on their tax returns. Given the tax and penalty implications of the Act and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, it is advisable that taxpayers should include cryptocurrency holdings in their foreign asset or income schedule.