Profit earned from sale and purchase of BitCoin is fully taxable in India. However, few doubts exist regarding it’s taxability method. With this article we will try to explain you how you should show income from BitCoin in your tax return this year in the most simplified language.
The main issue in taxability of income from Bitcoin is that under which head of income it shall be classified:
- Income under head “Capital Gain”
This head is generally used for taxability of profits on sale of capital assets like Land, Building, Bullion, Jewelry etc.
Even though Cryptocurrencies like BitCoin are not specifically included in definition of capital assets in Income Tax Act, 1961, Bitcoins are assets which are usually owned so holder can gain from an increase in its value. In that sense, they acquire the definition of capital gains. Which is a wide definition as per the Income Tax Act.Treatment
Accordingly if, BitCoins are held for more than 3 years, the gain should be classified as long term capital gain, which is taxable at 20% with benefit of indexation (click on this link to understand what is indexation). However, if the holding period is less than 3 years then the profit will be short term capital gain taxable at applicable slab rate.
- Income under head “Business/ Profession”
This head is generally used for taxability of income from business related to sale of goods or services.Rationale
Where there are too many trades in Bitcoins the owner may be classified as a trader and income will have to be reported as income from a business.
Business income from trading in BitCoin will be taxable at applicable slab rate for individuals and at applicable rate for others.
- Income under head “Other Sources” – It is the head where residual income i.e. the income which cannot be reported under salary, house property, capital gains, business and profession, is reported.Rationale
Since no specific law has been created for taxation of cryptocurrencies so, it may be taxed under this head.
Income under this head is taxable at slab rate for individuals unless any other rate has been prescribed specifically.
In case of Short Term Capital Gain:
In case of individuals, the tax rate chargeable under the three heads of income, as explained above would be as per slab rate, so it does not make much monetary difference under which head the income is disclosed as no clarity has been given by the Income Tax Authority on this. What is important is that income from BitCoin must be disclosed in Income Tax Return. However, if the volume of trading is high, an individual should disclose income under the head business.
In case of Long Term Capital Gain:
In absence of any clarification by Tax Authorities, most tax efficient option may be opted. If income other than income from Bitcoin is less than Rs. 5 lakh, then the income from BitCoin may be disclosed under the head Other Sources for claiming benefit of lower slab rate. In other cases, it may be more efficient to disclose it under head Capital Gains on account of benefit of indexation and lower tax rate. An analysis has to be made on case to case basis. However, option taken once shall be followed consistently for avoiding penalties. You may write to us on firstname.lastname@example.org to discuss your case and take our opinion.
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We have restricted the scope of above article to only individuals for a better understanding. Please read the disclaimer at the bottom of the website.