Will cryptocurrency gains be taxed in India? What the law says?


The government plans to compartmentalize virtual currencies and their taxation according to their use

The rapid rise of cryptocurrency in India has opened up several business and income opportunities for a number of people. Some people want to build wealth quickly by directly exchanging popular and sometimes high-yielding coins, while others are creating ways to accept them as payments at restaurants and online stores. There are also some who may have earned cryptocurrency through mining. However, there is some confusion as to how the government can tax such income or how an individual or institution should report it. The authorities’ decision to first ban and then allow trading in virtual coins has only added to the confusion.

In 2018, the Reserve Bank of India banned banks and other financial institutions from facilitating cryptocurrency transactions like Bitcoin, Ethereum, Dogecoin, and others. Later, in early 2020, the Supreme Court overturned the order, allowing the exchange of these virtual coins. Yet, they have not yet received legal tender status in India. The RBI said it was working on its own cryptocurrency and would proceed with caution, keeping in mind the disruption this new form of currency could cause to the existing financial order.

Despite all of this, you will have to pay taxes on this income. The confusion is whether to report them as capital gains or some other source.

The government plans to compartmentalize virtual currencies and their tax according to their use, whether for investments, payments or public services.

The government has already made it mandatory for companies dealing with virtual currencies to disclose profits or losses incurred on transactions. He also asked them to disclose the amount of cryptocurrency they hold on their balance sheets. But that has yet to get tax laws to govern their transactions. Yet income tax laws have always sought to tax income received regardless of how it was received.

So there are mainly four scenarios of income from cryptocurrency.

1. Mining

Mined cryptocurrencies are self-generated assets. The subsequent sale of these bitcoins would generally result in capital gains.

2. Transferred in exchange for real currency

The appreciation in the value of the cryptocurrency held as an investment can be classified as a long-term gain or a short-term gain depending on how long the asset is held.

3. Income from trading activity

Income from trading crypto coins would constitute business income and therefore profit can be taxed as applicable tax brackets.

4. Received when selling goods and services

These cryptocurrency gains can be treated on an equal footing with receiving money. Thus, the beneficiary would be taxed on the basis of profits or gains from a business or profession.

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