Not the most riveting topic, but knowing how to file taxes on crypto is essential if you want to invest. Despite the relative novelty of cryptocurrencies, the IRS is making significant efforts to ensure that crypto tax compliance is met. Many crypto-related activities are taxed, including exchanging one coin for another. Trying to reconstruct your profits and losses at tax time from shaky memory is a certain way to end up in the red. Moreover, even if you inadvertently fail to pay your cryptocurrency taxes, you may be subject to significant fines.
Learn all you need to know about filing taxes associated with cryptocurrency trading and income with this comprehensive tutorial. You’ll get a thorough understanding of the ins and outs of this complicated topic, including information about crypto tax filing and rates.
What are cryptocurrencies?
Cryptocurrencies, in layman’s terms, are digital currencies used to buy goods and services much like any other currency. However, it has been very contentious from the start because of the decentralized structure of its functioning, which means that it bypasses traditional intermediaries like banks and governmental bodies.
Currently, there are about 1,500 different digital currencies in circulation. This includes Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic, and many others. Since the lockout, the amount of cryptocurrency investments and trades has surged by orders of magnitude. Despite the lack of clear regulation from the Indian Government or the Reserve Bank of India, crypto investments have increased.
Legality of Cryptocurrency
Bitcoin and other cryptocurrencies are not yet recognized as legal money in India.
In 2018, RBI made an effort to implement a ban by cutting off banking services to cryptocurrency exchanges. The Supreme Court, however, determined that the restriction was unconstitutional because of the basic rights involved in online transactions.
The income tax agency has not yet provided any guidance on how cryptocurrency trading profits are taxed.
How is Cryptocurrency created?
Bitcoin and other cryptocurrencies are “mined” when powerful computers work together to solve incredibly difficult mathematical puzzles in exchange for a small portion of the transaction fees paid by users who make purchases with the cryptocurrencies. The circulation of bitcoin leads to the emergence of other digital currencies.
Market for Virtual Currencies
There is a huge $1.7 trillion in value in the cryptocurrency industry. In the present day, there are over 17,000 different cryptocurrencies listed on various exchanges, and this number is only expected to increase. Its decentralized character, which means it does not rely on middlemen like banks, financial organizations, or central agencies, has caused much controversy in India since its beginnings.
Exactly what category does cryptocurrency fall into—currency or asset?
Cryptocurrency’s tax status has been a topic of debate amongst specialists. It is common practice to use the terms cryptocurrency and crypto-assets interchangeably. It is safer to describe it as a “asset/property” until such time as it is officially recognized as a “currency” by the government.
Classifying them as “assets” rather than “liabilities” would be preferable to any official explanation because the tax implications would emerge regardless of the legality status.
In addition, the U.S. government had published a notice defining cryptocurrency as a “property,” which meant that any profit made from selling cryptocurrency would be subject to capital gains taxation.
Gains from selling cryptocurrency are subject to taxation.
Since the Reserve Bank of India (RBI) has not yet approved bitcoin, it is subject to taxation. A bitcoin investor is subject to income tax on any gains realized from the selling of cryptocurrency.
Except in the cases expressly exempted by the Income Tax Act, all income is taxable. Investors must pay income tax on crypto-transactions according to their nature until we obtain any clarification from the income tax administration.
Cryptocurrency and Tax Planning
Cryptocurrency taxation requires careful record-keeping, which might be a minor hassle. When dealing with crypto taxes, it’s important to keep in mind the following.
Transactions between parties in an exchange do not generate corresponding tax documentation. Your stock broker will have access to your financial documents if you employ their services. In other words, they are aware of both your initial investment and your final profit from the stock sale. Their services include calculating your cost basis. That’s not something that can be done with an exchange. They operate as an intermediary in bitcoin transactions but have no knowledge of the time, source, or market value of the cryptocurrency you use.
In case you were wondering, the IRS can track down those who are using cryptocurrencies. Exchanges are subject to subpoenas from government agencies seeking information on cryptocurrency traders. As an added bonus, they employ data analytics software. So the IRS can find crypto traders even if they don’t know everything about them.
Why you need to file crypto taxes
First and foremost, you must submit crypto taxes because doing so is required by law and because it is in your best interest to have a positive relationship with the tax authorities. At first, many people avoided crypto because they thought it was a financial black hole where criminals and dishonest people could wash their money.
This happens in the bitcoin realm just as it does with any other form of payment. But recently, governments have begun to deploy technologies that leverage transparency, a core feature of blockchain technology.
Compliance is increasing every year, even if the reporting done by exchanges is not up to the very high criteria associated to more conventional investments like equities. More reporting requirements have been introduced by authorities on cryptocurrency exchanges as their attention turns to the sector. The Internal Revenue Service (IRS) of the United States would want more money so it can better enforce crypto tax laws.
A lack of receipt of tax forms related to cryptocurrency trading is not conclusive evidence that no taxable activities have occurred. Whether or not you think the exchange reported your actions, you must nonetheless report them. Avoid being audited by not doing this.
How will Cryptocurrency be taxed in India?
Since April 1, 2022, the maximum tax rate of 30% applies to gains made with cryptocurrencies, as per the Union Budget 2022-23. All “virtual digital assets” (Bitcoin, NFT, and their revenues) would be subject to this regulation. In particular, cryptocurrencies will be taxed at a higher rate than traditional investments like stocks and mutual funds.
The taxation of digital assets in cyberspace is addressed in the Finance Bill, namely in Section 115BBH, as indicated by the Minister of Finance. There will be a 1% TDS on all crypto transactions exceeding Rs 10,000 per year, and as per clause (2)(b), any loss incurred through the sale or exchange of virtual digital assets cannot be deducted from any other income under any other section of the IT Act. In addition, the cost of acquiring the VDA is the only expense that may be deducted when calculating profits from the sale of digital assets.
The laws regarding the 1% TDS became effective on July 1, 2022, and the gains will be taxed beginning on April 1, 2022.
Remember that the federal tax rate on bitcoin profits for the year is a flat 30%. Consider the case of purchasing a cryptocurrency for Rs 10,000 and then selling it for Rs 15,000. You would realize a profit of Rs 5,000, but would owe tax on the additional Rs 1,500 (at 30%).
There may be no rewards for the buyer of a crypto asset that has appreciated significantly but has not yet been sold. Gains on such cryptocurrency assets that have not yet been “realized” will not be subject to taxation until some of the holdings are sold.
Use crypto tax calculator to calculate your taxes easily.
Gains from crypto-transactions would be subject to income tax as either I business income or (ii) capital gains under current law. Investor intent and the nature of the transactions themselves will determine how they are classified.
Gains from trading cryptocurrencies in significant numbers will be considered “business income” for tax purposes.
If, however, you hold onto your investments for the long haul so you may reap the rewards of compounding value with fewer trades, your profits will be treated as “capital gains” and taxed accordingly.
Every taxpayer has to have their categorization examined, and they should see a professional if they want to file their taxes correctly.
If considered an investment gain:
Cryptocurrency purchases and sales might be subject to capital gains or losses if they are deemed investments.
It is deemed a “capital gain” if the final selling price is greater than the initial purchase price, and a “capital loss” if the final sale price is lower than the initial purchase price.
Holding cryptocurrency for less than three years (=36 months) will result in short-term capital gains tax at the rates specified by the appropriate income tax brackets. After three years (> 36 months), crypto-assets are considered long-term investments and are taxed at 20% plus indexation.
In case of capital losses :
The income tax authorities have not issued any guidance on how capital losses should be handled. Please seek professional advice if your sale transaction has resulted in a loss.
If classified as business income :
The impact of Goods and Services Tax (GST legislation) must be considered if crypto transactions are recorded as company income. A full write-off of all transaction costs, both direct and indirect, against cryptocurrency sales proceeds is guaranteed. To determine how much tax to pay on the earnings, they will be added to the rest of the income.
Assuming it is income from a business, the GST implication is as follows.
The provision of goods or services, or both, is the taxable event for GST purposes. Supply as a notion encompasses many different kinds of exchanges.
The term “services” refers to everything except tangible products, financial assets, and currency. Transactions involving the use of money or its conversion to cash or another form for which a fee is collected are also included.
Taking into account the foregoing definition, it is possible that GST will apply to the supply of cryptocurrencies as a good or service.
According to a proposal from the Central Economic Intelligence Bureau (CEIB), all cryptocurrency transactions should be subject to goods and services tax (GST) since cryptocurrencies are intangible assets. The idea is still being discussed, therefore until the government defines its taxability, a general rate of 18% may become applicable.
If your annual revenue is more than Rs 20 million, you should talk to a tax professional about the possibility of having to pay GST.
If classified as other sources of income :
As such, crypto assets can be recorded as “income from other sources” on an ITR form and taxed as such. Any additional income is added to the total and taxed at the taxpayer’s normal rate.
Furthermore, there are arguments in favor of taxing profits made from crypto assets as “speculation business revenue,” which would subject them to the highest rate possible. Taxpayers, however, stand to gain by treating it as either capital gains or regular business income pending further guidance from the income tax department.
There has been no explanation from the income tax department, but it is still necessary to declare the profits in the ITR and pay taxes on the gains.
Is crypto a good long-term investment?
Bitcoin and Ethereum are just two of many cryptocurrencies that have lofty goals at launch, some of which may be realized in the far off future. Although there is no guarantee that a cryptocurrency project will succeed, early investors in a crypto project that achieves its aims might reap substantial rewards.
However, for any cryptocurrency project to succeed in the long run, it must be adopted by a sizable user base.
How to Invest in Bitcoin for the Long Haul
Bitcoin, being the most well-known cryptocurrency, has the network effect; more people want to buy Bitcoin because so many other people already do. At the moment, Bitcoin is seen by many investors as “digital gold,” but it also has the potential to be utilized as a digital currency.
Will a greater extent than with fiat currencies like the U.S. dollar or the Japanese yen, Bitcoin investors expect the cryptocurrency to appreciate in value over the long run due to its limited supply. When compared to other currencies, Bitcoin’s supply is limited to less than 21 million coins. When conventional currencies fall in value, many people believe Bitcoin will rise in price.
Bitcoin’s proponents argue that the digital money might become the first genuinely global currency if utilized widely.
The Ethereum Market in the Long Term
By purchasing Ether, investors may diversify their holdings on the Ethereum platform. Unlike Bitcoin, which may be thought of as digital gold, Ethereum is developing a worldwide computing platform that can accommodate a wide variety of cryptocurrencies and a vast ecosystem of decentralized apps (“dApps”).
Ethereum has the potential to take advantage of the network effect and produce long-term, sustainable value because of the many cryptocurrencies that have been established on its platform and because dApps are open-source. Smart contracts, which may be used on the Ethereum platform, are pre-written agreements that carry out their terms automatically.
As compensation for the processing of smart contracts, the Ethereum network requests Ether from its users. The widespread use of smart contract technology has the potential to revolutionize existing markets and totally upend established ones, including the real estate and banking sectors.
The more people utilize the Ethereum network, the more valuable each Ether token gets. Owners of Ether, who are optimistic about the long-term prospects of the Ethereum platform, will benefit directly from their investment.
Conclusion
Some people may find filing their taxes using cryptocurrency easy, while others may find it perplexing and hard. More crypto-related activity usually means more complex tax filing procedures. As an added complication, even seemingly innocuous activities can have far-reaching monetary consequences. Using Bitcoin (BTC) to buy something as mundane as a cup of coffee may result in unexpected tax obligations.
It may be worthwhile to invest in the services of a tax expert who can assist you deal with the complexities of running a cryptocurrency-based business and remain compliant. You should keep thorough records of all trades and transactions regardless of whether or not you engage a professional.
FREQUENTLY ASKED QUESTIONS ON CRYPTO TAX IN INDIA
1.Ques: When Crypto is received as compensation, how will the 30% crypto tax be applied?
Ans: The 30% tax bracket does not apply to cryptocurrency wages. It will be subject to “income from salary” taxes because it is a salary.
2.Ques: Can the loss incurred on one crypto asset be set off against the profit of another crypto asset?
Ans: No losses can be offset against other losses. If, for instance, you have lost money on Ethereum (ETH) but made money on Bitcoin (BTC), only the latter will be included when calculating your net worth. The 39% tax rate that will apply to your Ethereum profits as of the fiscal year’s conclusion.
3.Ques: Is there any tax on Crypto Mining?
Ans: The mining of cryptocurrencies is not subject to taxation under the proposed legislation. The mining of cryptocurrencies does not provide a tax-free revenue stream, thus any tokens acquired in this way must be reported as business income.