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Taxation of gain on sale of Cryptocurrencies

✍Cryptocurrencies have been in the limelight in the recent past due to dramatic rise and fall of prices. Several Indians have invested in cryptocurrencies such as bitcoin, ethereum and dogecoin. Such investors must be careful while preparing their tax return and appropriate disclosure of the income earned from the sale of cryptocurrencies must be made.

👉Though neither the Income Tax Act, 1961, nor the CBDT stipulates any specific tax treatment for income earned from investments in cryptocurrencies. But the classification of income and its computation may be determined by whether an individual holds cryptocurrency as an investment or stock-in-trade.

✔Income earned from the sale of cryptocurrency can be taxed either as income from capital gains (if held as investment), or as profits/gains (If held as stock-in-trade) from business or profession.👇

A.) Capital Gain (Held as Investment)

✔ Cryptocurrency may likely be qualified as a financial asset, as the Indian regulatory framework does not consider them legal tender.

✍The Act defines capital asset broadly to include any kind of asset, interest or rights in a property, unless specifically excluded. Cryptocurrency is not specifically excluded from the definition of capital asset.

✔ Cost of acquisition is the cost of purchase of such cryptocurrency plus the broker’s commission or wire transfer fee.

✔ Since cryptocurrencies are held in electronic wallet we cannot identify which tranche of purchase is sold therefore we consider FIFO method to determine the cost of acquisition.

✔ The taxpayer shall be required to report and pay taxes on each such disposal. Some taxpayer may incur loss while selling the cyrptocurrency in that case losses can be set off against gain of other assets subject to existing rules regarding setoff capital loss.

✍Note: If Cryptocurrency held for less than 3 years from the date of acquisition shall be considered as short term capital gain. More than 3 years shall be considered as Long term capital gain.

B.) Income from Business/ Profession (Held as Stock-in-Trade)

👉If taxpayer speculate on the short term price movement may be considered as Trader. Whether a person qualifies as trader or investor depends on aspects including frequency in buying and selling, period of holding, and intent of investment.

✔ if taxpayer qualifies as trader then income from sale of cryptocurrency shall be taxed as Income from Business and Profession.

C.) Disclosure in Income Tax Return

✔ In case Taxpayer income exceeds INR. 50 Lacs in a year shall be required to report the same in the "Schedule for Assets and Liabilities" along with cost of acquisition. As Cryptocurrencies are regarded as assets therefore shall be reported in the said schedule.

✔ Additionally, A Taxpayer who qualifies as ROR (Resident and Ordinary Resident) then required to disclose overseas income and assets in the Income Tax Return.

✍Considering the tax and penal consequences under the Act and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, it may be prudent for taxpayers to disclose the cryptocurrency holdings in the "foreign asset or income schedule".


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