How to disclose cryptocurrency gains while filing ITR

A cryptocurrency is a decentralised digital asset and a medium of exchange based on blockchain technology. In layman language, cryptocurrencies are digital currencies designed to buy goods and services, similar to our other used currencies. However, since the start, it has essentially been bought and sold as virtual/digital assets. 

More than 1,500 virtual currencies, such as Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic etc., exist today. The investments in cryptocurrencies have grown despite any regulation from the government or the Reserve Bank of India (RBI).   

So far, the Indian Government has not granted any legal tender status to the cryptocurrency. Neither the income tax department has come up with any clarification on the tax implications on the gains earned from the crypto-transactions. 

In the absence of any legal backing from the government, it would be fitting to classify the investment in cryptocurrency as an ‘asset/property’. The U.S. Government also has issued a notification to classify it as a ‘property’ and therefore levied capital gain taxes on the profits from the sale of the cryptocurrencies. 

Taxation on the gain from the sale of cryptocurrency

The investors must pay tax on the crypto-transactions based on the nature of the transactions even though there is no clarification from the income tax department. 

As per the general income tax rules, the gains on the sale of cryptocurrencies would be taxable as:

(i) Business income

(ii) Capital gains

(iii) Other sources

The classification will depend on the nature of these transactions and the intention of the investor.

Profits from the crypto-transactions will become taxable as ‘business income’ if the trades are frequent and the volumes are high. On the contrary, if the purpose of owning them is to benefit from longer-term holding via an appreciation in value with fewer trades, then they can be taxed as ‘capital gains. The taxpayers may take the help of an expert to review the classification for the cryptocurrency transactions every year if he is unsure about the correct classification. 

Classified as Capital gains

If the crypto-transactions get classified as ‘investments’, any gains or losses will be taxable under the head capital gains. 

Capital gains will be calculated as the amount of cost exceeding the sale value. If the cost is higher than the sale value, then the transactions will be considered as ‘capital losses’ 

If the crypto-assets are sold after holding it for 36 months, they will be treated as a long term investment and taxed at 20% with indexation benefit. 

Short term capital gains tax will be leviable as per the applicable income tax slabs if crypto-assets are held for less than 36 months. 

Classified as business income

If the sale of cryptocurrency is reported as business income, then the implication of GST law should be examined. All the direct and indirect expenses will be allowed as deductions from the profits on the sale of the crypto assets. The profits will be added to the other income and taxed as per the income tax slab rates. 

If classified as ‘Other sources of income.’

Crypto-assets can also be reported as ‘income from other sources while filing ITR and taxed accordingly. Income from other sources is added to the total income and taxed as per the applicable tax slab of the taxpayer. 

Also, there are views to treat the income from crypto assets as ‘speculation business income’ and taxed as per the highest tax slab. However, the taxpayers can benefit from classifying it as ordinary business income or capital gain until any income tax authorities’ clarification. 

Disclosure of crypto assets in the Schedule of Assets and Liabilities 

The Ministry of Corporate Affairs (MCA’s) has mandated the disclosure of gains and losses in virtual currencies and reporting the value of cryptocurrency as on the balance sheet date. Changes to this effect have been made in schedule III of the Companies Act. This mandate is the first move by the government towards regulating cryptocurrencies. 

Also, taxpayers earning more than Rs 50 lakh annual income must disclose assets and liabilities while filing an income tax return in Schedule AL. 

(Assets and Liabilities). One must consult an expert to report these in the assets schedule while filing ITR.

Also, it is high time that the income tax department clarifies the category under which these assets/income is to be reported. 

For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in