Investments in cryptocurrencies have seen a rise in the last few years with more and more cryptocurrencies joining the bandwagon. After the Supreme Court lifted RBI's ban on cryptocurrencies, many individuals invested in virtual currencies in hopes of a potential windfall.
Despite any clear regulations from the government or the Reserve Bank of India, most investors have added cryptocurrencies to their portfolios.
Due to the absence of any legal regulations from the government, RBI, or the income tax department, investors are unclear regarding the tax implications from the crypto transactions.
Many investors even avoid paying taxes on these transactions. However, one must understand that gains from cryptocurrencies are not tax-free and investors must pay taxes on these transactions depending on their nature.
Not reporting these transactions can lead to penalties for the investors from the income tax department and there can also be a risk of prosecution in certain cases.
Cryptocurrencies can be classified as assets for investment purposes. Section 2(14) of the Income-Tax Act, 1961 defines a capital asset as any kind of property held by a person, whether or not connected to business or profession.
Based on the nature of your transactions, cryptocurrency gains can be taxed under business income, capital gains, or income from other sources.
Gains from the crypto-transactions can be taxed under ‘business income’ in the case of frequent trades and in high volumes. However, if you hold these virtual currencies to benefit in the long run and have fewer trades, then they can be taxed under capital gains.
Under capital gains
If you file returns for crypto transactions under capital gains, then the tax levied will depend on your holding period. For investors holding cryptocurrencies for over 36 months, the gains will be taxable as long-term capital gains (LTCG), and for less than 36 months, short-term capital gains (STCG) tax would be applicable.
Long-term capital gains are taxed at a flat rate of 20 percent while short-term capital gains are added to the investor's total taxable income and taxed at the current IT slab rates.
For individuals who have capital gains from cryptocurrencies will have to use ITR form 2 for filing tax returns.
The LTCG will be reported under CG Schedule of ITR Form 2 under the head "From the sale of assets where B1 to B8/B9 above are not applicable" for FY 2020-21.
Meanwhile, STCG will also be reported under CG Schedule of ITR Form 2 under the head "STCG on assets other than at A1 or A2 or A3 or A4 or A5 above".
If classified as business income, then also the gains will be added to your total taxable income and taxed at the current IT slab rates plus surcharges and cess. An individual will have to file the returns via the ITR form 3.
For reporting as a business income, you have to file it in Part A -Trading account under "Sale of goods" in ITR-3. The net profit/loss from the sale of cryptos has to be reported under the heading, "Net profit before taxes”.
However, if you are confused and want clarification on crypto taxation, it's better to consult your tax advisor before disclosing crypto earnings on ITR forms.
The government recently extended the deadline for filing the ITR for FY21 to December 31, 2021. According to the Income Tax Act, ITR filing is compulsory for individuals earning over ₹2.5 lakh in a year.