Warren Buffet, the greatest investor of all time, once dumped bitcoins and actually called them “squared rat poison”. However, few investors heed this advice; Cryptocurrencies have generated a lot of interest among investors of all ages due to the recent increase in their value. It is estimated that around one million Indians have invested in cryptocurrencies, reports suggest.
Are cryptocurrency earnings taxable?
Tax authorities around the world are working to establish tax rules for cryptocurrencies. Even though cryptocurrencies are not mentioned in Indian income tax law and there are no defined rules yet, you must declare them in your tax return and pay taxes on them. .
An asset or a currency?
When we talk about taxation, a lot of questions arise. Should cryptocurrencies be considered a currency or a digital asset? If it is considered an asset, what should be the holding period of those assets in order for them to be classified as long-term or short-term fixed assets? Since cryptocurrencies are not yet widely accepted like other currencies, they are now considered “digital assets” in several countries. Note that currently India does not have a rule on how these cryptocurrencies should be taxed.
Should they be treated as fixed assets in India?
Countries such as the UK and the US have established that cryptocurrencies should be treated as fixed assets. The definition of fixed assets in India’s income tax law is more inclusive and will therefore cover assets that may not be defined separately. These assets can be treated as long-term assets when held for a period greater than three years and short-term assets when held for a period of less than three years. It may be reasonable to allow indexation @ 20% for the acquisition cost. Regarding the tax rate, we can choose to tax them at the rate of 20% (additional tax and surcharge if applicable). Short-term capital gains may be taxed at the flat rate applicable to the taxpayer. Note that so far no specific guidance is available under the income tax law for the taxation of crypto assets.
Can frequent crypto trading be classified as a business activity?
If a taxpayer has a large volume of transactions and does not intend to hold these assets for the longer term, the question arises as to whether such an activity should be considered a business. This should be assessed on a case-by-case basis. Viewing crypto trading as a commercial activity involves declaring and claiming the expenses involved in such activity. If the turnover exceeds a specified threshold, doubt as to the applicability of the GST may arise. Some of these issues are not yet addressed by the tax authorities. Another aspect that needs to be clarified is whether the loss resulting from the sale of crypto assets can be offset or deferred.
What should you do
First of all, you need to make sure that you keep proper records of all of your transactions. Second, always keep in mind that these assets are not regulated in India and therefore there is a high potential risk in owning or trading them. However, you have to pay taxes if you have earned income. Get help from an expert who can guide you. If you are a miner, you may have created a self-generated asset. Miners also spend a lot of time and money building these assets, and as a result, taxation can be a whole different ball game for them.
Archit Gupta is founder and CEO of ClearTax. The views are his.