Include cryptocurrency gains in income-tax returns, say analysts

Treat it as capital gain if you buy and hold; as business income if you trade frequently

Around 15 million investors have invested in cryptocurrencies worth Rs 15,000 crore, according to estimates provided by the Indian crypto industry. However, the income tax (I-T) department has not yet framed the requisite rules on tax payment and filing of returns for this asset class. Experts suggest investors should nonetheless do both based on the best advice available.  

Ambiguities galore

A cloud hangs over the legal status of cryptocurrencies in India, so the tax authorities, too, have not defined rules for them. Manish P Hingar, founder of Fintoo, says, “The Reserve Bank of India has not legalised cryptocurrencies. Hence, there is ambiguity regarding whether they should be included in capital gains calculation while filing tax returns.”  

The first issue taxpayers must deal with is how income from the sale of cryptocurrencies should be classified. Amarpal S Chadha, tax partner and India mobility leader, EY, says: “There is ambiguity regarding whether it should be classified as capital gain or income from business.”

According to experts, taxpayers should rely on the existing principles of intent or nature of investment, holding period, frequency of trade, etc, to arrive at an answer. Aditya Chopra, managing partner, Victoriam Legalis-Advocates & Solicitors, says, “If you have traded frequently and the volume has been substantial, classify your earnings from cryptocurrency as income from business.” On the other hand, if you have held cryptocurrencies more for investment purpose (and not traded frequently), then gains from their sale may be treated as “capital gains”.

Clarity is also required on the holding period that should determine whether the gains are long-term or short-term, and whether indexation benefit should be allowed. “Another issue is whether capital loss should be allowed to be set off or carried forward,” says Archit Gupta, chief executive officer (CEO) Clear.

A question mark also hangs over how people who engage in crypto mining should be taxed. Sameer Jain, managing partner, PSL Advocates & Solicitors, says, “Some believe crypto mining, being a service, should attract the goods and services tax (GST).”

Clarity is required on a few other issues too. Taxpayers whose annual income exceeds Rs 50 lakh are required to report their assets and liabilities, along with cost of acquisition, in the Schedule for Assets and Liabilities. There is ambiguity regarding where such disclosure should be made in this schedule.

What experts suggest   

• When gains are treated as capital gains, then 3 years may be taken as the cut-off holding period
• Gains from sale of cryptocurrencies held for more than 3 years may be treated as long-term capital gains and taxed at 20% with indexation benefit
• Gains from sale of cryptocurrencies held for less than 3 years may be treated as short-term capital 
• gains and taxed at the applicable slab rates
• If the number of trades is large, this income should be classified as business income and taxed accordingly
• Maintain proper records of all transactions and seek professional advice

Finally, there is ambiguity regarding whether cryptocurrencies are to be treated as foreign assets. Chadha says, “Taxpayers who qualify as Resident and Ordinary Residents (RoRs) are required to disclose overseas income and overseas assets in their ITR, irrespective of income in the year, in the schedule for foreign assets and income reporting. Whether cryptocurrency qualifies as a foreign asset or gains earned from sale of such cryptocurrency as foreign income, has not been specifically clarified by the tax department.”

What you should do

If you engage in cryptocurrency trading or investment, you are likely to be on the taxman’s radar. If you have sold cryptocurrencies during the previous year, declare the income from these sales in your ITR. Seek expert advice to understand how the gains should be computed. Considering the tax and penal consequences, including the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, it may be prudent to disclose your cryptocurrency holdings in the foreign asset or income schedule.

Two ITR forms are relevant for those with earnings from cryptocurrencies. Those who have capital gains should use ITR-2 while those who have income from business or profession should use ITR-3.