It is important to understand the nuances of cryptocurrency as an investment tool

Cryptocurrency such as Bitcoins, Ethereum and others, is a form of decentralised digital money. They function on the principle of blockchain technology connected to a network of computers. People around the globe are taking interest in cryptocurrency. If you are one of those interested in cryptocurrencies, you need to understand the various aspects of it. And the question of how cryptocurrencies can attract tax is as much valid if you are looking at investing. So, have you ever thought about how the government can tax your cryptocurrency investment? Find out the various ways in which it can be done.

Concerned authorities around the world are planning to design standard rules of taxation for cryptocurrencies. There is no escape from paying tax on the gains from cryptocurrencies.

As far as India is concerned, in 2018, the Reserve Bank of India (RBI) had banned banks and other financial institutions from facilitating cryptocurrency transactions. In 2020, the Supreme Court reversed the order. Since then, though trading is allowed on these virtual coins, they have not yet received the status of a legal tender. However, that doesn’t spare anyone from paying tax on cryptocurrency trades.

In India, there are no specific guidelines on the taxation of cryptocurrency in the Income-Tax Act, 1961. But taxpayers need to report transactions if they have invested in cryptocurrencies and gained from those investments.

Earlier this year, in March, Minister of State for Finance, Mr. Anurag Singh Thakur said in response to a question the Rajya Sabha that “the gains resulting from the transfer of cryptocurrencies/assets are subject to tax under the head of income, depending upon the nature of holding of the same”.

Should you classify cryptocurrencies as ‘currency’ or ‘asset’?

When you talk about cryptocurrencies, there’s still a lot of ambiguity as far as rules and regulations around the same are concerned. If your cryptocurrencies are held for more than 36 months, your gain will be categorised as long-term capital gains. But your gains from a shorter period of time will be categorised as short-term capital gains. These gains are taxable at different rates. The long-term gains are subject to tax at a rate of 20 percent. The others, however, including the ones where gains are received during a shorter period of time, are subject to tax at the applicable personal taxation rates.

Can crypto-trading can be classified as a business activity?

If a trader carries out cryptocurrency transactions often, any profit from there on would be taxable as business income. If cryptocurrencies are held as ‘stock-in-trade,’ the income arising from there will also attract tax.

Therefore, while you are continuously trading in cryptocurrencies, you must know that the profits you gain will be taxable as business income.

So, while dealing with cryptocurrency, remember that you need to pay your tax if you have generated an income. Secondly, you must maintain a record of all your transactions. Most importantly, take the help of a taxation expert to guide you through.