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Taxation: How does taxation in cryptocurrencies work

Table of Contents

Cryptocurrency prices have been soaring over the last six years, and many have earned quite well through investing in them. But the predominant issue is taxation. How do you pay taxes on your cryptocurrency earnings? We have boiled it down for you to understand it in a simple way. 
The nature of digital currency investments is unclear under the Indian tax laws. But understand this: there is no escaping the taxes.
In December 2017, the IT department of India surveyed all the major cryptocurrency exchanges to understand how they function, their user base, etc. Followed by their survey, they sent notices to about 5,00,000 investors for not paying the taxes. Besides, cryptocurrencies have been on the RBI and the government’s radar for quite some time. 
As of today, the RBI has banned banks from dealing with these exchanges, traders, and investors in any way. The government, however, is yet to draft specific regulations for cryptocurrencies. The legality status of cryptocurrencies in India is not defined properly. It’s ‘alegal’ as of now. Meaning, it is neither legal, nor illegal. Having said that, you should still pay your taxes. There is absolutely no evading it.
Here’s what you can do.

Individual Investors

Chartered Accountants (CA) warn that since the tax law of cryptocurrency is in the grey zone, it’s open to other interpretations.
Here’s a tax notice sent by the I-T Department to investors recently: “In case of gains, you have to state profits or capital gains made by you from a transaction in cryptocurrencies year-wise with statements showing the workings.”  
Most CAs advise investors to treat their cryptocurrency investments as capital gains tax.
The model of capital gains is that your investment will be locked for a certain period of time in order for its value to appreciate. Capital gains taxes are divided into long term and short time.
“For most investments such as equities, jewellery, land, debt funds, etc., the time period is specified, according to which an item may be taxed under short-term or long-term gains,” says Archit Gupta, CEO of the online tax-filing firm, ClearTax. “However, since it is not specified, we are going to assume and take the longer time-frame of three years, and only after holding the investment for three years it will be called long-term gains.”
As to the short term gains, the money is added to the income and it is taxed according to the tax slab an investor falls under. For example, if you earn over INR 10 lakh, it will be taxed at 30%. 
On the contrary, if it falls under long term gains, your income will be taxed at 20%. Once the indexation benefit is applied, the tax rate goes further down, which will allow you to adjust inflation. These assessments are done every year based on the cost inflation released by the Central Board of Direct Taxes.
The details of tax treatment are quite ambiguous and hence Gupta advises a safer alternative: report it as income from other sources. Add the amount to your business income or your salary and then pay your taxes as per the bracket under which your income falls.

For traders

If you are a trader, earnings from your cryptocurrencies are treated as income from a business. Certain expenses pertaining to business or office maintenance, such as internet expenses, buying computers, administration cost, office rent, etc., can be deducted. A tax will be applicable on the remaining amount as per the bracket it falls under.
If your turnover crosses INR 2 crores, it’s important you go to a Chartered Accountant for a tax audit. Another important thing you should remember is selecting the correct form to file returns. “Depending on whether an individual is treating it as capital gains or income from other sources or business, ITR2 or ITR3 must be picked,” explains Gupta.

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