There’s no doubt that a cloud of FUD has been cast over the Indian crypto community due to the current lack of regulations and the possibility of unfavourable ones in the near future. Although the levels of enthusiasm for Blockchain technology and its ground-breaking applications remain high, its adoption continues to struggle owing to seemingly complex legalities.
Unfortunately, more often than not, the perception of law is confused for the actual law itself. For instance, while the RBI merely restricted banking access to entities dealing in virtual currencies (aka cryptocurrencies), the general perception amongst most Indians has been that cryptocurrencies have been declared illegal.
Nevertheless, if you’re making profits out of cryptocurrencies, you ought to pay tax for it. This article attempts to clear few of the most common concerns regarding dealing in cryptocurrencies in India, determination of income generated thereon and its tax implications.
Dealing in cryptocurrencies
If an individual seeks to hold a certain class of cryptocurrencies in India, he is not out rightly barred from doing so. However, given the ring-fencing notification issued by the RBI prohibiting Indian banks from facilitating such transactions, one may have to resort to peer to peer trading (much alike the barter system) or use the P2P matching facility offered by Indian crypto-exchanges.
There are broadly three events, in context to cryptocurrencies, which may lead to the generation of taxable income. The illustration below classifies crypto-related events into taxable and non-taxable categories.
Classification of Income
Although Indian tax laws do not dictate any specific treatment for income generated from cryptocurrencies, it is pertinent to read and apply the existing provisions in the most appropriate manner possible.
Lack of specific regulations does not make income from crypto-related transactions exempt from tax.
On the contrary, while cryptocurrencies are not illegal per se, any unaccounted and untaxed income shall be deemed as illegitimate wealth. This, of course, would trigger severe penal provisions including fine, imprisonment, or both.
The illustrations below shed light on how particular income is to be classified and reported for income tax purposes. Further, peculiar aspects of Blockchain technology, such as airdrops or forks, shall also need to be factored in while determining tax liability. Their treatment shall depend upon the classifications determined basis the charts given below.
Crypto enthusiasts engaged in purchase and sale of cryptocurrencies:
Classification of a person as trader vis-à-vis investor will be contingent upon a plethora of factors including:
- Average holding period;
- Intention of earning profit versus capital appreciation;
- Frequency of transacting; etc
Further, the manner of accounting and tax computation will also be applied according to such classification.
Classification of mining income into business profits versus casual income is subjective. The following factors would need to be kept in mind for this purpose:
- Operation of a mining facility v/s investment in mining pool;
- Time and effort spent on mining;
- Nature and size of mining rig; etc
Trading on Foreign crypto-exchanges
A number of Indians utilise foreign crypto-exchange platforms to execute cryptocurrency trades. In case a trader / investor stores his crypto-assets on such an exchange’s wallet and then conducts trades, he or she would be deemed to be in possession of foreign assets. Both, foreign income and foreign assets require specific disclosure in the annual income tax return, as per the Black Money and Imposition of Tax Act, 2015.
Incomes identified above shall need to be reported in the annual income tax return along with any other income the individual may have earned during the financial year. It is important to reiterate at this point that reporting of income generated from cryptocurrencies and filing taxes accordingly is strongly recommended.
The Indian Income Tax Department is empowered by law to requisition data which may help in determining tax liabilities of Indian residents. Moreover, the Indian Government is a member of the “automatic exchange of information” mechanism, set-up by the OECD, which enables cross-border sharing of taxpayer’s information amongst member countries. The tax department can well utilise these powers and issue notices to investors/traders/miners who have not filed accurate taxes.
Moreover, the Department can also issue summons, order investigations or conduct search & seizure procedures if it has reason to believe that any income has evaded tax. In any such case, the taxpayer under scrutiny will have to appear for hearings and furnish extensive proof to substantiate that taxes were filed accurately.
While the Government is working hard to understand the new technology and formulate a comprehensive regulatory framework around all of its aspects, it is each citizen’s civic duty to comply, at the very least, with existing regulations. Not only must we ensure compliance ourselves, but should also promote the dire need for compliance while spreading blockchain related education to our fellow community members.
Reporting accurate income and filing taxes is far more convenient than being put under scrutiny by the income tax Department. In the unfortunate event of a tax adjustment or penalty owing to non-compliance, ignorance of law will not sustain as a valid argument.
The author Anoush Bhasin is a Chartered Accountant, representing Quagmire Consulting, an Indian firm specialising in taxation of Blockchain and cryptocurrency transactions in India. They offer assistance in taxation, book-keeping, compliance, scrutiny assessments to crypto investors, traders, miners and entities providing Blockchain solutions:Tax planning – prior to undertaking cryptocurrency transactions
Disclaimer: Opinions in the article are of the author, Coin Crunch India may or may not agree with the same. Coin Crunch India cannot be held responsible for any damages occurring from relying on the the information provided in the article.
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