Tax Implications On Investment In Cryptocurrency

With the prominence of the ‘Digital India’ initiative, digital/online transactions have become mandatory and are widely used across all sectors. People have been well-acquainted with popular digital transaction methods like bank transfers, credit or debit cards, Google Pay, etc. However, the emerging and one-of-a-kind addition to the entire digital transaction spectrum is Cryptocurrency. Like China, the crypto industry in India holds the potential to grow into a billion-dollar economy. The infusion of this foreign investment can immensely satiate the financial needs of various sectors, especially the MSMEs to sustain in the post-pandemic world.

Cryptocurrency in a nutshell

Cryptocurrency is a virtual currency, considered more secured than real money. The transactions are fully secured by cryptography that enables us to purchase goods and services without depending on banks for transactional verification. Cryptocurrency uses blockchain technology and Bitcoin has been considered the maximum traded cryptocurrency besides Litecoin, Ethereum, Z cash, Dash, etc.

Notably, Cryptocurrency is not centrally administered or regulated by any specific Government bodies like the Reserve Bank of India which administers physical currencies in India. By this, a series of questions arise in our minds, including if Cryptocurrency is at all legal in India or how is it taxed in India.

A brief on the tax implications on investments in Cryptocurrency

The Government of India has not yet introduced the taxability of cryptocurrency into the statute books, as its concept is still fairly new in India. However, the possibility of tax payment cannot be totally ruled out. The Indian Income Tax imposes a tax on income received in any form.

The possibility of Cryptocurrency tax is perceived under the following scenarios:

Scenario A: Cryptocurrency investment gets transferred in exchange for real currency

If cryptocurrency investment gets transferred in exchange for real currency, long term capital can be gained, supported by the appreciation in value. Depending on the period of holding the cryptocurrency, short-term capital gains can be achieved. Consumers should be aware that long-term investment gains are taxed at a flat rate of 20% while short-term gains will focus on individual slab rates.

Scenario B: Considering the nature of investment

The taxation applicable to cryptocurrencies undoubtedly depends on the nature of the investment no matter if it is held in the form of assets or currency. If profits are based on business income, the tax will be imposed according to the applicable slab rate. However, when profits are held for investment purposes, the tax ratio can be equivalent to tax gains in the capital gains form.

Scenario C: Through Mining

A self-generated capital asset, Cryptocurrency-driven mining can be considered a taxable event. But, this taxation has not been recognized by Section 55 of the I-T Act of 1961. Anyone can avail of a business deduction for the resources and equipment utilized in mining. However, the nature of such deduction is not applicable to several factors, like if the Cryptocurrency has been mined for personal profits. For a mining business, such deductions can be easily availed for lowering the tax bill.

Scenario D: When Cryptocurrency is received as consideration on the sale of products/services

When Bitcoins in Cryptocurrency are received under such conditions, they must be treated according to the receipt of money. It signifies that the recipient has achieved an income. Further to getting the income based on an individual’s profession or business, he/she would be taxed under the head profits.

Summing Up

Cryptocurrency transactions are steadily picking up a great pace in India by remaining in the initial stages. Considering this, the Government of India should tap this potential space at the earliest by introducing the much-awaited Crypto bill that will dispel all ambiguities around the taxability and legality of Cryptocurrency.