Digital currency is increasing in popularity in India as an investment option and also as a payment means by companies for their services and products. This brings the question of how the Indian crypto tax will work.
The Framework Of Indian Crypto Tax
While the RBI (Reserve Bank of India) has not yet granted any status of crypto being their legal tender, there cannot be any escape from paying cryptocurrency taxes on investment gains. The Government of India is planning to regulate digital currencies and also their treatment of tax on the basis of their usages like investments, payments, or utility as per a report.
Gains in digital currency can take place in several ways like staking, mining, farming, or the traditional selling and purchasing. Gains from digital currency can be classified under “business income” while other actions are likely to fall under “income from other sources”. Bringing in extra amendments and rules would needlessly be a burden on the taxpayer.
Bitcoin is mined by the high powered computers where these computers solve complex mathematical problems that result in obtaining a Bitcoin reward. Similarly, digital currency staking offers a token reward for evaluating whether the transaction conforms to any specific protocol needs. Yield farming which typically happens using the Ethereum blockchain involves the process of lending out cryptos for a payment. So you may wonder, is there any income tax on Bitcoin in India 2021? Read further to know more.
While it is still unclear what regulatory framework will be levied on digital currencies in India, it has been heard that the government may ban the use of private cryptocurrencies in India.
In respect to the Indian crypto tax, in March, the Indian Government made it necessary for the companies who deal with digital currency to disclose the profit and loss levied on crypto transactions and also the amount of digital currency held by them in their balance sheets. The amendments that were made under the Company’s Act get enacted on April 1, 2021.
Anurag Singh Thakur who was the minister of state for finance at that time clarified,
“The gains resulting from the transfer of cryptocurrencies or assets are subject to tax under the head of income, depending upon the nature of holding of the same.”
Cryptocurrency: An Investment Asset Or Business Asset?
You may wonder, is cryptocurrency legal in India 2021? In India digital currency is neither legal nor illegal. There is no regulation as of now. But there will soon be one, as the government has proposed a new bill for digital currency in India which will be presented in the winter session of the parliament. Till then let us see what crypto is. Is it an investment asset or a business asset? With that, we will be able to find out about the taxation of cryptocurrency in India. A digital token is bound to be a capital asset if it is bought for the purpose of investment, which implies it should be taxed under capital gains. These investments are classified into short term or long term capital gains that depend on the period of holding.
Any gains received after holding digital currency for a period of 36 months or more should be taxable as they are in long run capital gains, while the profits earned during the shorter periods would be classified as short term period gains. These profits fall under the Indian crypto tax according to the slab rates that are applied to all the taxpayers. On the other hand, long term capital gains fall under the taxation of 20% flat rate with the advantages of indexation as per Harsh Bhuta, who is a partner at accounting firm Bhuta Shah & Co. According to Bhuta, “much clarity” is still needed on the ways to treat the varied types of income and gains.
The Indian crypto tax under the long term category can be reduced once the benefit of indexation is applied, which enables the investors to adjust for inflation during the times when these investments took place. Every year, the CBDT (Central Board of Direct Taxes) reveals the cost inflation on which these assessments take place.
On the contrary, if a trader takes out digital currency transactions on a frequent basis, any profits after that would be taxable as a business income.
More Disclosure Required On Indian Crypto Tax
Cryptocurrency in India is not regulated at all. But many nations have a system of taxation for digital currency profits in place, but the cold response of Indians to the digital currency space makes it difficult for inventors to file their tax returns. As of May 2021, Indians have kept nearly $6.6 billion in digital currencies as compared to just $923 million as of April 2020 as per the report.
As digital currency regulations in India stays unclear, an evolving number of Indians are availing digital tokens by purchasing and selling on foreign channels which may offer better customer services and features. If Indian heads warm to the digital token industry, however, that could attract some of that business back to domestic digital currency exchanges.
The Indian government may charge the 18% GST (Goods and Services Tax) on transactions on foreign digital currency exchanges in order to level the field of playing with domestic ones, as per the reports in July. India has also allegedly taken into account a 2% equalization charge on transactions with foreign cryptocurrency exchanges. For Indian digital currency exchanges, the 18% GST is levied as the trading fee to customers, which is the same as the setup for stock brokerages. These are all the GST on cryptocurrency in India.
The Bottom Line
The players of the market are now biting their nails ahead of the winter session of the parliament when the first cryptocurrency legislation of the nation is likely to be offered. The Cryptocurrency and Regulation of Official Digital Currency Bill are thought to contain disclosure needs for income tax returns for crypto holdings in this country along with foreign crypto exchanges by Indian residents. It may also contain detailed accounts of the Indian crypto tax if there is any. Then we shall also have the crypto tax calculator India.