What Steps Should Be Taken for Crypto Holders Who Don’t Pay Tax

Want to invest in cryptocurrencies? Here is how you will pay your income tax.

A cryptocurrency is a form of electronic cash and a decentralized digital asset. Launched in 2009, Bitcoin was the initial cryptocurrency in the world. The Indian cryptocurrency market has faced numerous regulatory obstacles. An estimated 5 million dealers across 24 exchanges traded in India, with daily trading volumes of up to 1,500 Bitcoins equaling about Rs. 1 billion. Moneycontrol.com reports that during the nationwide lockdown, bitcoin trading volume in India soared by 400%. The tax implications of cryptocurrency gain realization are currently unknown under Indian income tax law. It is important to note that India's tax authorities have not yet classed cryptocurrency return income under any specific bracket and there are currently no plans to do so.

The aforementioned transaction won't be subject to taxation under the Income Tax Act of 1961 ("ITA") if cryptocurrency is classed as money. The phrase "income" as defined under section 2(24) of the ITA gives an inclusive list that does not cover "money" or "currency," and the RBI does not regard cryptocurrencies as currency. While cryptocurrency would fall under "Capital Gains" or "Profit and Gains from Business or Profession" if it were viewed as property or goods, respectively.

With Mr. Anurag Singh Thakur, Minister of State for Finance, stating on March 28, 2021, that "the gains resulting from the transfer of cryptocurrencies/assets are subject to tax under a head of income, depending upon the nature of holding of the same," it is now certain that cryptocurrency gains will be taxed. It has been decided that cryptocurrencies would not be considered legal tender in India and will be subject to taxation. The main question is whether virtual currency revenue is considered company income or capital gains. The money should be taxed as business income if the seller is a trader by profession. If it is not company income, it would be subject to capital gains tax.

If cryptocurrency is bought by a taxpayer to invest in it, it may be considered to be a capital asset. A person's possessions of any type, whether or not they are related to his or her business or profession, are referred to as capital assets under Section 2(14) of the ITA. Although the word "property" has no legal definition, it refers to any kind of interest that a person would be able to acquire, own, or enjoy. Therefore, if bitcoin is held for investment purposes, any gain from its transfer may be regarded as capital gains. Depending on the holding time, infrequent crypto transactions may be seen as long- or short-term capital gains. Gains from holding cryptocurrencies for 36 months or longer would be taxed as long-term capital earnings; gains from holding them for less time would be taxed as short-term capital gains. Short-term capital gains are taxed at the applicable taxpayer-specific slab rates. And with the benefit of indexation, long-term capital gains are taxed at a flat rate of 20%.

However, it may be determined that the taxpayer is trading in cryptocurrencies if the transactions are considerable and regular, in which case any earnings would be subject to business income tax. Similarly, money derived from cryptocurrencies will be subject to tax under business income if they are held as "stock in trade." As a result, the ongoing cryptocurrency trading activity and any profits made are taxable as business income. Although the revenue authorities could argue that such trading is classified as speculative income, which would hurt taxpayers.

In closing, virtual currencies have the potential to improve India's digital infrastructure and lower infrastructure costs incurred by banks due to international payments, securities trading, and regulatory compliance. Government clarification on cryptocurrency taxation is still needed, especially regarding matters like how capital gains or business income should be handled, whether income is considered to be speculative, whether losses can be set off against gains or carried forward, and whether gift tax provisions are deemed should be used.