Cryptocurrencies are growing in popularity globally and the technology that underpins these currencies, blockchain, is also gaining traction across the globe. Cryptocurrencies are digital assets that can be used as a medium of exchange for online transactions. These digital assets are secured through strong cryptography and use a peer-to-peer (P2P) network to conduct transactions.
Cryptocurrencies in India
In April 2018 the Government of India (GOI) and the Reserve of Bank (RBI) imposed stringent regulations on cryptocurrencies in India. Before April 2018 there was a sharp rise in cryptocurrency trading in India, due to this they had limited governmental regulations and oversight. Post-April 2018 there was an almost complete prohibition of cryptocurrency transactions in India and the consequential shut-down of the cryptocurrency trading market and aggregators. One should also look at how to report crypto taxes.
RBI’s Stance on Cryptocurrencies
As India slowly moves towards a digital or cashless economy it has started adopting technologies like Blockchain. The RBI favors the use of such technology due to its reliability and its relative incorruptibility. Even though the country is adopting such technologies to streamline various sectors of the economy cryptocurrencies still remain outliers.
In 2013 the RBI noticed the increasing popularity of cryptocurrencies in India and cautioned users, traders and investors against the use of such virtual currencies, stating that they carry no intrinsic value. The Enforcement Directorate and the Income Tax Department were quick to take action against businesses associated with cryptocurrency and forced them to stop business operations. In 2017 the RBI also prohibited all entities regulated by it from performing any transactions related to cryptocurrencies this includes, registering accounts associated with the procurement, sale or trade of cryptocurrencies, accepting cryptocurrencies as collateral for loans, and facilitating the transfer or receipt of cryptocurrencies.
After the 2018 budget speech, there was an inter-ministerial council set up which included the RBI and the IT Department to examine
- The status of cryptocurrencies in India and globally.
- The existing regulatory structures in place for cryptocurrencies globally.
- How to tackle issues related to consumer protection and money laundering.
Crypto-Tax in India
In India holding, selling, dealing in, mining, generating, issuing, transferring, using or disposing of cryptocurrency is prohibited, and therefore, there are no regulations around the taxation of such digital assets. But for the sake of speculation let’s take three possible instances where income generated from cryptocurrencies could be taxed.
- The exchange of cryptocurrency for a fiat currency
- Cryptocurrency held as stock-in-trade
- Profits or Gains from crypto-mining operations
- The receipt of payment for goods or services in cryptocurrency
The exchange of cryptocurrency for a fiat currency
If you make a profit on the sale of a unit of cryptocurrency, the difference between the acquisition price of the cryptocurrency and the selling price of the cryptocurrency will be considered a taxable income. The nature of tax will be determined by the period for which the cryptocurrencies were held.
Cryptocurrencies as long-term assets
If the cryptocurrency is held for a period longer than 36 months it will be considered a long-term asset for taxation purposes. Any profits or gains on the sale of a cryptocurrency held for a period longer than 36 months will be considered Long-Term Capital Gains and will be taxed at a flat rate of 20%.
Cryptocurrencies as short-term assets
If the cryptocurrency is held for a period shorter than 36 months it will be considered a short-term asset for taxation purposes. Any profits or gains on the sale of a cryptocurrency held for a period shorter than 36 months will be considered Shot-Term Capital Gains and will be taxed according to the appropriate tax slab.
Cryptocurrency held as Stock-in-Trade
If cryptocurrencies are being used for the purpose of trading, any income arising from such operations would be considered Income from Business Operations and will be taxed according to the individual’s tax slab.
Profits or Gains from crypto-mining operations
Cryptocurrencies generated from mining operations are considered self-generating assets. Any income generated from the sale of such assets would be considered capital gains. However, the cost of acquisition of a digital asset like cryptocurrency cannot be determined as it is a self-generated asset. Cryptocurrencies also do not fall under the purview of Section 55 of the Income Tax Act, 1961 that clearly defines the cost of acquisition of certain self-generated assets.
In the case of the Supreme Court versus Mr. B.C. Srinivasa Shetty the capital gains tax computation fails. Therefore, no capital gains tax will arise as a result of profits from crypto-mining activities.
The receipt of payment for goods or services in cryptocurrency
Cryptocurrency received as payment for goods or services will be treated just like any other form of payment. Since this income is being received as a payment for goods or services provided by a business it will be taxed under the head of Income from Business or Profession.
Cryptocurrency tax calculators
As the popularity of cryptocurrencies grows globally many platforms have started offering auxiliary services like crypto-tax calculators. These services can save you a lot of time and money as they can create an accurate tax report for all your cryptocurrency transactions in minutes. Let’s take a look at some of them.
ZenLedger is a crypto-tax software that is designed to be easy-to-use and simple to understand, it’s ergonomic design can make tax filing a breeze. The platform will allow you to import all your crypto-transactions, calculate profits from such transactions, create tax reports and auto-fill tax forms in minutes. ZenLedger has partnered with TurboTax to make filing your taxes even easier.
ClearTax has developed its own crypto-tax calculator. This calculator allows you to ascertain your total tax liability from crypto-transactions within minutes. After providing basic information like the cost of acquisition of the cryptocurrencies, the sale price of the cryptocurrencies, and any transaction fees associated with these transactions you will be provided a tax report. You can use this tax report to file for income taxes.
CoinTracker is a free app that can be used online for calculating your total crypto-tax liability and filling out the relevant tax forms. You will be required to sign up using your email address. Upon signing in to your CoinTracker account you will be directed to the tax calculation page, on this page, you will need to follow three simple steps to create a tax report.
- 1: Import all your exchanges and wallets
- 2: Review your transactions
- 3: Download your tax report and review the auto-filled tax forms
myCryptoTaxCalculator is an easy to use crypto-tax calculation software that can help you fill out the required information in tax forms. myCryptoTaxCalculator will generate a tax report for you in three simple steps.
- 1: Import exchanges and wallets
- 2: Review your transaction history
- 3: Generate a tax report
CryptoTrader.tax is a tax reporting software built to make crypto-tax reporting less painful. Instead of spending hours pouring over spreadsheets this software allows you to simply import your exchanges and wallets directly onto the platform. The CryptoTrader.tax engine sorts this data and runs it, and with a click of a button, you can receive a tax report that you can file yourself.
So the next time you file your taxes and are wondering how to declare the digital assets you hold, you can use one of these crypto-tax calculators to make tax filing a breeze.