Making money from cryptocurrency trading? Know how your earnings are taxed

The Indian government is planning to compartmentalise virtual currencies and their tax treatment on the basis of their use case — payments, investment, or utility. Crypto trading is likely to see a formal taxation structure as the Ministry of Finance has reportedly formed a committee to find out if income made by crypto-trading could be taxed.

Ketan Dalal, Founder at Katalyst Advisors, said cryptocurrencies are a nascent asset class, even for tax experts, and no separate guidelines have been issued for this asset class. It will be helpful if the government clarifies taxation on cryptocurrencies, he added. “The picture will be more clear once a draft crypto law comes into the public domain.”

Unlike listed securities, where short-term capital gains is applicable at a flat rate of 15 per cent, income from cryptocurrencies are taxable according to the tax slab of the investors, with a cess of 4 per cent. If the total taxable income of an investor, excluding short-term gains, is below the taxable income, that is Rs 2.5 lakh, one can adjust this shortfall against the short-term gains. Long-term capital gain on crypto assets attract a capital gains tax of 20 per cent, where the investor will get the benefit of indexation. “If shares are held for more than a year, it is considered as capital gains. But no such criterion is set for cryptocurrencies,” Dalal said. “The tax rules on such assets should apply like any other capital asset.”

There is no embargo on cryptocurrencies, making them an exception, said Amit Singhania, Partner, Shardul Amarchand Mangaldas and Company. Unlike listed securities, where short-term capital gains is applicable at a flat 15 per cent, the income from cryptocurrencies are taxable according to the tax slab of the investors, with the applicable surcharge and a cess of 4 per cent.

Investors can set off any short-term capital loss from sale of equity shares against short-term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for 8 years and adjusted against any short-term capital gains made during these 8 years. According to the market experts, a taxpayer will only be allowed to carry forward losses if he has filed his income-tax return within the due date.

Classification of earnings from the crypto assets as business income or capital gains completely depends on the facts and circumstances of each case, said Singhania. If an individual is trading frequently in such assets or his livelihood is dependent on the income from trading in cryptocurrencies, then such earnings are classified as business income.

Navneet Dugar, Advocate and Principal Consultant of Zemis Advisors, said if the income from cryptocurrencies is classified as business income, it will be taxed at the rate applicable for the taxation of business income. If the income from cryptocurrencies is neither classified as business income nor as capital gains, then it will be counted as income from other sources. This is known as residuary income. “In such cases, the applied tax rate will be 25 per cent for the businesses, whereas individuals are taxed as per their respective tax slab rate, after adding the gains to their income.”

If the government classifies cryptocurrencies as an asset or commodity, the existing norms are likely to continue. That can change if there is a separate code or guideline for taxation of digital tokens.

Sharat Chandra, a blockchain & emerging tech evangelist, said individuals earning more than Rs 50 lakh yearly have to disclose their holdings according to the Income Tax Act. “Equalization levy shall be applicable if sale is done through an international marketplace platform,” he added.

NFT can represent the right to use underlying assets, which are tangible in nature, Chandra said. “A commodity is being sold at an exchange without physical delivery. In such a case, tax treatment would be the same as in a commodity transaction.”