To begin with, yes, income derived from cryptocurrencies can be taxed. The gains which are derived from selling cryptocurrencies come under two categories – they are either business income or can be categorized as capital gains. This classification decides which tax return form is required to be filed and how much tax will be levied on the made gains.
Supreme court and the ban
India saw a Bitcoin rally just last year and this was one of the primary reasons why the Supreme Court of India lifted RBI’s ban on the different cryptocurrencies. A lot of investors in the nation took to making investments in virtual currencies. In the following article, you can learn about how to earn from different cryptocurrencies and how this should be disclosed in the Income Tax Return form.
Let’s take into consideration Section 2 of the Income Tax Act- 1961, in which a capital asset refers to any kind of property which is owned by a person. It does not matter whether this is connected with his business in particular or his profession. The term, property, does not have any statutory meaning but it still signifies anything that a person can enjoy, hold or acquire. Hence, bitcoin is considered to be a capital asset, in case it is purchased just for the simple purpose of investment by a taxpayer. Any gain that arises on a transfer of a cryptocurrency is considered to be a capital gain. Even so, if transactions are quite frequent; it could be assumed that the taxpayer is trading those cryptocurrencies. So, in such cases, the cryptocurrency sale’s income would become taxable as a business income.
However, as far as India is concerned; you will not find any business dealing in a cryptocurrency. You will even find investors and brokers, who deal frequently with commodities and stocks. But only when it comes to cryptocurrencies; you will never find an official broker who holds a virtual currency as a stock in the trade.
Short-term and long-term capital gains
Now, it’s important to understand the gains made from investing in cryptocurrencies come under which category of capital gains. So, if an investor holds a cryptocurrency for longer than 36 months, then the gains would be taxed as a long-term capital gain, and in case it is less than 36 months, then it would be a short-term capital gain. You need to remember that short-term capital gains are taxable as per the slab rates applicable to the concerned taxpayer. Long term capital gains on the other hand are taxed at a flat rate of 20% with consideration of indexation.
However, the cost of acquisition is not available for all kinds of cryptocurrencies. So, as of now, if the acquisition of an asset is not determined, then the machinery provision for evaluating these gains will falter. Therefore, no capital gains can be put on such assets. However, the best thing to remember is that for individuals who have capital gains or even business income coming out of cryptocurrencies, then ITR 2 and ITR-3 make for the relevant forms for valid tax returns.