Hold cryptocurrency? Know tax implications in India

In this era of digitisation, the advent of 'Cryptocurrencies' marks an additional milestone for digital asset innovation. Cryptocurrencies being a new attraction in India, specific regulatory framework dealing with cryptocurrencies are still under deliberation.  

There are many types of cryptocurrencies available. Few popular types are Bitcoin, Litecoin, and Ethereum have different features and usages. Cryptocurrencies are stored in an online database known as "digital wallets".

Currently, cryptocurrencies are not managed by any central authority. To trade in cryptocurrency, typically a digital currency exchange account is required to enable the buy and sell of the same.

Also Read: Cryptocurrency in India: What's the govt's stand, legal status, its future

It will be interesting to note that the definition of 'income' under the current income tax laws is wide and inclusive in nature. Thus, any income (including loss) on account of trade in cryptocurrency in India for Indian residents is likely to have some tax implications.

Further, the tax laws classify income under different heads. The computational methodology, tax rates, set-off provisions, carry forward of loss, reporting requirements, etc. will vary significantly based on the head of income under which the income under consideration is taxable. 

Hence, it's imperative to determine the head of income under which the income from cryptocurrency will be taxable. 
Broadly, the income from trade in cryptocurrencies can be classified under two heads of income i.e.: 

• Income from business and profession; or 
• Income from capital gains

Currently, there are no specific provisions in Indian tax laws dealing with the taxability of cryptocurrency. 

However, based on general principles of taxation the taxability of the same can be evaluated.  Based on existing provisions, income tax authorities had issued a circular in the context of sale of shares/securities in relation to the head of income under which the same should be taxed. 

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The circular provided general guidance and relied on the intention of the individual to determine whether the income from sale of shares/securities will be capital gains or business income. 

In absence of specific clarity, it is possible to draw reference from the circular for determining the head of income for cryptocurrency.  

• Income from Business and profession: 

If the intention of the seller is more inclined towards trading in cryptocurrencies as stock-in-trade and the same is also reflected by way of volume and frequency of trades, one may conclude that any income from cryptocurrency trade for such individual will be 'Business income'.

Thus income (net of related expenses) will be taxable as per applicable slab rates. Further, depending on the volume/turnover of trading there may be a requirement of maintaining books or tax audit.

• Income from Capital Gains: 

If the intention of the seller is towards holding the cryptocurrencies as an investment, then one could argue that income from the sale of cryptocurrency will be classified under 'Capital Gains/Loss'. 

Further, depending on the holding period of the capital asset i.e. cryptocurrency, the gain/loss will be classified as long-term or short-term.  

If held for a period of more than 36 months they will be treated as long-term, else short-term.

Gain on transfer of short-term capital assets will be taxed at normal applicable slab rates and for long term, it will be taxed at 20% (plus applicable surcharge and cess). For long term, the benefit of indexation will also be considered and thus the related cost step-up will be available. 

Also Read: Meet the 13-year-old Goa boy managing millions of dollars in cryptocurrency

Apart from taxability, an important point to ponder is reporting requirement in the income tax return forms. 

As it is likely that cryptocurrencies will also be treated as an asset, it will be imperative to report the same in the income tax return forms. Some key reporting considerations when filing income tax returns are: 

• Mandatory reporting of Assets and Liabilities in AL schedule: Schedule AL is required to be filled by an individual if his taxable income is above Rs 50 lakh. In Schedule AL, the cost of specified assets (i.e. immovable such as land, building, immovable assets such as jewellery, bullions, vehicles, aircraft, yacht, financial assets such as bank deposits, shares and securities, loans and advances given, insurance policies, cash in hand) are required to be reported. Also, any liability in relation to these specified assets require reporting.  Currently, there is no guidance on the requirement of reporting cryptocurrencies in Schedule AL.

 

• Mandatory reporting of foreign assets in FAR schedule: Resident and ordinary resident individual of India is mandatorily required to report the prescribed details of overseas assets held. Overseas assets include bank accounts, financial interests, immovable property and other assets. If cryptocurrencies are determined to be a foreign asset, then it will be imperative to report the same in the FAR schedule.  

Also, apart from the above considerations, the complexities will be much higher in terms of computing the fair market value, costs, taxable income, reporting requirements, etc. for the below set of transactions:-

1. If a particular cryptocurrency is traded for another cryptocurrency 
2. If a cryptocurrency is used to pay for goods or services 
3. If employees are awarded performance incentives in form of cryptocurrency, etc. 

 
Thus, given the peculiar features of cryptocurrency and the pace at which it is being used, further clarity on taxability, reporting requirements and related legal/regulatory framework would be helpful. 
 
(Homi Mistry is Partner with Deloitte India. With inputs from Jimish Vakharia, Senior Manager and Reena Poddar , Manager, Deloitte Haskins & Sells LLP.)