Riding the ups and downs of the Euphoric Cryptocurrency Rush? Know your tax implications

Cryptocurrency is now a buzz word, it all started with Bitcoin and today, new Cryptocurrencies are popping everyday up like mushrooms after a good spell of rain. Millennials and Gen-Z population are riding the Cryptocurrency euphoria gripping the world, be it a meteoric rise or a catastrophic fall. As of today, few countries have recognized them and El Salvador has gone to the extent of formally accepting some Cryptocurrencies to be tendered as a legal currency and it can be told with certainty more countries will follow suit.

So, what is India's stand on the same? It is still unclear. The RBI has raised the ban on Cryptocurrency allowing Indians to hold or trade Cryptocurrencies, however there is no clear framework regarding the nuances of the same, which leads to another pertinent question, how to deal with the taxation aspect of the Cryptocurrency transactions one carries out?

Three situations are likely to arise, situation one is someone who holds Cryptocurrency as an investment. Cryptocurrencies have not found their place in the Income Tax Act, 1961's literature so far, leading to interpretation of the existing provisions of the Act. Cryptocurrencies can be treated as a Capital Asset as defined under section 2(14) of the Income Tax Act, 1961. Under this section, Capital Asset is defined as "property of any kind held by an assessee, whether or not connected with his business or profession". There are certain exceptions to the definition which is unconnected to this discussion. Based on this provision, cryptocurrencies can be treated as a Capital Asset and be taxable as "Long Term Capital Gain/Loss" or "Short Term Capital Gain/Loss" based on the holding period. Wherein the Cost of Acquisition will be the Purchase Price of the respective Cryptocurrency which can be adjusted with Indexation in case of "Long Term Capital Asset". Long Term Capital Gains are taxed at 20% plus respective cess and surcharge while Short Term Capital Gains are taxed at respective slab rates.

The second situation arises when one is into trading of Cryptocurrencies. In this case, the same is to be treated as a business income and the provisions of "Profits and Gains under Business and Profession". The same will be taxed at the respective slab rates of the individual in respect to their net taxable income.

The final situation arises when payments amongst two parties be carried out in a Cryptocurrency rather than any Fiat currency (INR). In such cases, the receipt of such Cryptocurrency will be treated on par with Fiat currency and the income will be treated in the same lines as receipt of Fiat currency under the provisions of "Profits and Gains under Business and Profession" if the Cryptocurrency is transacted in connection to a business transaction. If not transacted with respect to a business transaction, the same should be looked from the perspective of "Income from Other Sources" or be tested if the transaction is of the nature of any income in the hands of the receiving party.

This blog post strives to clear the ambiguity clouding the world of Cryptocurrency in the Indian perspective at the point of publishing this article. Further, the aforementioned tax treatment of the Cryptocurrency transactions in various situations are the interpretation of the author given in the interest of tax assessees who have dealt with Cryptocurrencies in FY 20-21 and the taxabilty of the same which is due to be declared in AY 21-22. It is to be noted that there are no provisions or rules thereof with respect to tax treatment of Cryptocurrencies at the time of publishing the blog post. The provisions and rules thereof with respect to the tax treatment of Cryptocurrencies must be adhered to as and when the same are notified by the Government.

Disclaimer - It is to be noted that all reasonable care has been taken by the author to avoid errors. The author accepts no responsibility for any error crept in any manner and shall not bear any kinds of losses/damages incurred by a reader on account of such errors. This article should be treated only for informational and knowledge gain purposes only. The author shall not accept any responsibility for any loss occurred by anyone on acting on this article.