Cryptocurrency Tax: Make Money Through Cryptocurrency Trading? Know how your income is taxed


New Delhi: Cryptocurrency is no longer just a millennial or Gen Z fad as more and more institutions have started to embrace this new age asset class. But now the question is how to pay the taxes on these transactions.

The Indian government is considering compartmentalizing virtual currencies and their tax treatment based on their use case – payments, investment, or utility. Crypto trading is likely to see a formal tax structure as the Ministry of Finance has reportedly formed a committee to find out whether income generated from crypto trading could be taxed.

Ketan Dalal, founder of Katalyst Advisors, said cryptocurrencies are a nascent asset class, even for tax experts, and no separate guidelines have been issued for this asset class. It will be helpful for the government to clarify the taxation of cryptocurrencies, he added. “The picture will be clearer once a crypto bill falls into the public domain.”

Unlike listed securities, where short-term capital gains are applicable at the flat rate of 15%, income from cryptocurrencies is taxable according to the investors’ tax base, with a cessation of 4%. If the total taxable income of an investor, excluding short-term earnings, is lower than the taxable income, ie Rs 2.5 lakh, we can adjust this shortfall according to short-term earnings. Long-term capital gains on crypto assets are subject to a 20% capital gains tax, where the investor will benefit from indexation. “If the shares are held for more than a year, this is considered a gain. But no such criteria are set for cryptocurrencies,” said Dalal. “The tax rules on these assets should apply like any other fixed asset.”

There is no cryptocurrency embargo, which makes it an exception, said Amit Singhania, partner, Shardul Amarchand Mangaldas and Company. Unlike listed securities, where short-term capital gains are applicable at a flat rate of 15%, income from cryptocurrencies is taxable according to the investor’s tax bracket, with the applicable surcharge and a cessation of income. 4%.

Investors can offset any short-term capital loss resulting from the sale of equity shares with a short-term appreciation of any fixed asset. If the loss is not fully compensated, it can be carried over for 8 years and corrected for any short-term capital gains realized during these 8 years. According to market experts, a taxpayer will only be allowed to carry forward losses if he has filed his tax return on time.

The classification of income from crypto assets as business income or capital gains depends entirely on the facts and circumstances of each case, Singhania said. If an individual frequently trades such assets or their livelihood depends on income from cryptocurrency trading, then that income is classified as business income.

Navneet Dugar, lawyer and senior consultant for Zemis Advisors, said that if income from cryptocurrencies is classified as business income, it will be taxed at the applicable rate for corporate income tax. If income from cryptocurrencies is neither classified as business income nor as capital gains, then it will be counted as income from other sources. This is called residual income. “In such cases, the tax rate applied will be 25 percent for businesses, while individuals are taxed at their respective tax rate, after adding the gains to their income.”

If the government classifies cryptocurrencies as an asset or a commodity, existing standards are likely to endure. This may change if there is a separate code or directive for digital token taxation.

Sharat Chandra, a blockchain and emerging technology evangelist, said people earning more than Rs 50 lakh per year must disclose their holdings in accordance with the Income Tax Act. “The equalization tax will be applicable if the sale is made through an international market platform,” he added.

NFT may represent the right to use the underlying assets, which are tangible in nature, Chandra said. “A commodity is sold on an exchange without physical delivery. In such a case, the tax treatment would be the same as in a commodity transaction.”

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