Bitcoins and cryptocurrencies have been a hot topic ever since the Coronavirus pandemic hit. Several advisors have been recommending that you hoard up on some crypto, ever since the lockdown in India has been underway.
The multiplier effect on this advice comes from the fact that cryptos have been given legal status in India. Atleast, as it goes in India: for the time being. That’s until the Finance Ministry introduces its Draft Cryptocurrency Bill regulating/ banning cryptocurrencies. But how do you pay tax on sale of bitcoins? Is there a bitcoin tax?
Grey matter
The taxation of incomes arising from bitcoin sale or from bitcoin mining is somewhat of a grey area. Since the Income-tax Act does not explicitly define virtual currencies or cryptocurrencies, there is no one method that can be adopted to disclose incomes arising from cryptocurrency or bitcoin sales.
Method one
The standard approach as followed for Capital Assets: that is, the incomes arising from sale of bitcoins shall be chargeable to capital gains tax. Capital gains tax is a type of income tax.
In case you hold cryptos for a period exceeding 36 months, they shall be chargeable as long term capital gains and in case you hold them for a period less than 36 months, they shall be chargeable to short term capital gains tax.
Short term capital gains tax shall be chargeable at individual slab rates. That is, whatever income bracket you fall in, tax shall be charged at the same rate. For example, if for Financial Year (FY) 2019-20, your income is Rs. 12.5 lakhs and you are paying tax in the 30% bracket, then short term capital gain tax shall be charged at 30%.
Long term capital gains, on the other hand, shall be chargeable to tax at the rate of 20% with indexation. Indexation means the cost price shall be multiplied with the Cost Inflation Index and then subtracted from the selling price. For example, if you purchased a bitcoin for Rs. 10 in 2010 and sold it for Rs. 100 in 2020, then the long term capital gain shall be (assuming cost inflation index as 2.11):
Rs. 100 – (Rs. 10 * 2.11)
or Rs. 100 – Rs. 21.1
or Rs. 78.9
The long term capital gain tax applicable shall be Rs. 78.9 * 20 % or Rs. 15.78. Here, Rs. 15.78 shall be payable as income tax.
Method two
Method two is to disclose the income as income from other sources and to pay the applicable slab income tax rate. That is, the income shall be added to the existing income of the individual and charged to tax at the applicable tax rate.
For example, let’s say your income for FY 2019-20 is Rs. 11 lakhs and your bitcoin sale income is Rs. 1 lakh. In this case, the applicable tax rate shall be 30% and the bitcoin sale income shall also be chargeable to tax at 30% tax rate.
Our suggestion
There is no one finite answer to the taxability of incomes arising from cryptocurrency, given the stance of the government. The task becomes trickier, given that the taxman may adopt a different methodology from the one chosen. Our suggestion would be to exercise caution while adopting either of the methodologies.
