Tax Implications of Crypto currencies

People are discovering fantastic chances with excellent returns on their investment (ROI). Despite the massive increase in the number of crypto currency traders and investors, individuals in India are concerned about taxation and the asset's future. Due to circumstances such as the reach as high and fall of prices, the views of certain high-net-worth individuals and actions taken by various governments, cryptocurrencies have recently been in the spotlight. Neither the Income Tax Act of 1961 nor the Central Board of Direct Taxes specifies any special tax treatment for earnings from cryptocurrency investments. Under the Act, income earned from the sale of cryptocurrency can be taxed either as income from capital gains, or as profits/gains from business or profession. The classification of income and its computation mechanism are determined by whether an individual holds cryptocurrency as an investment or stock-in-trade.

Capital gains: Because the Indian regulatory framework does not consider cryptocurrency to be legal tender, it is likely to be classified as a financial asset, as it grants the holder exclusive access/spend rights. The Act defines capital asset broadly to include any kind of asset, interest or rights in a property, unless specifically excluded. Cryptocurrency is not specifically excluded from the definition of capital asset.

The difference between sale consideration, cost of acquisition and expenses incurred on transfer of cryptocurrencies is considered as capital gains. The cost of acquisition is the cost of purchase of such cryptocurrency plus the broker’s commission or wire transfer fee.

While cryptocurrencies are held in an electronic wallet, they become fungible when purchased at different times and at different prices, making it difficult to determine which tranche of purchase is being sold and the cost of acquisition. In this scenario, the taxpayer must use the first-in-first-out method to calculate the acquisition cost. The capital gains are further classified into short-term or long-term gain depending on the period for which such an asset is held. Gains earned on cryptocurrency held for less than three years from the date of acquisition are considered short-term gains and taxed as per applicable slab rates (top tax rate 42.74%), while those held for more than three years are considered as long-term. The gains are subject to a beneficial tax regime (top tax rate 28.49%). The taxpayer is also eligible for indexation benefit on the cost of acquisition. In case one cryptocurrency is bartered with another, each swap shall be considered a transaction and be subject to capital gains tax. Considering the recent fall in cryptocurrency prices, some investors would also have incurred capital loss while selling cryptocurrency. These losses can be set-off against gains from sale of other assets, subject to existing rules.

Income from business or profession: Taxpayers who speculate on short-term price movements, or who hold the cryptocurrency as stock-in-trade may be considered as traders. Whether a person qualifies as trader or investor depends on aspects including frequency in buying and selling, period of holding, and intent of investment. Where a taxpayer qualifies as a trader, any income earned from sale of cryptocurrency shall be taxed as income from business or profession. Taxpayers should also evaluate whether the income shall be considered as speculative income or not. Whether the income is considered speculative or not will depend on whether the cryptocurrency is considered a commodity and is periodically or ultimately settled otherwise than by way of actual delivery or transfer of such commodity.

Return disclosures: Taxpayers whose income exceeds 50 lakh in a year are required to report their assets and liabilities in Schedule for Assets and Liabilities along with cost of acquisition. Since cryptocurrencies are also regarded as assets, taxpayers shall include cryptocurrencies in the said Schedule.

Additionally, taxpayers who qualify as resident and ordinary residents are required to disclose overseas income and assets in the tax return. Considering the tax and penal consequences under the Act and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, it may be prudent for taxpayers to disclose the cryptocurrency holdings in the foreign asset or income schedule.