Bitcoin evangelists, it seems, have had a staggering success world over in making people trust in the cryptocurrency. Like every asset, the confidence of investors in Bitcoin is of utmost importance. A whopping 1500 per cent surge in its value in less than a year suggests that cryptocurrency has become the top choice for many investors. In India, like many other countries, legal loopholes around the most popular cryptocurrency has opened a Pandora's box for tax authorities.
Though Bitcoin is yet to be officially recognized in the country, the Reserve Bank of India has on three separate occasions put out risk warnings against investing in virtual currencies. In simple terms, there is no regulator when it comes to the status of cryptocurrencies in India. So, are the gains from Bitcoin taxable?
Archit Gupta, Founder & CEO ClearTax, says, "Even though Bitcoins are not specifically mentioned in the income tax act, 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."
Accordingly these can be classified as long-term when held for more than 3 years and short-term when held for less than 3 years. In case of long-term gains indexation benefit must be allowed and gains taxed at 20 per cent. Short term gains will be taxed as per the applicable income tax slab.
Saurabh Agrawal, CEO and Co-founder, Zebpay, a Bitcoin exchange, agrees, "One needs to pay tax on profits made from investing in Bitcoin. One should declare the income while filing taxes."
The issue about taxability of Bitcoin, however, is not so simple. There has also been a debate about under which head income from crypto currency should fall. Gupta, says, "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. In the absence of specific guidance on the matter, some taxpayers may choose to report this income under the fifth head of income which is 'income from other sources'." It is the head where residual income, income which cannot be reported under salary, house property, capital gains, business and profession, is reported.
Dinesh Sharma, Special Secretary in the Economic Affairs Department and Chairman of the nine-member inter-disciplinary committee, says, "According to the law if somebody makes some money that should be subject to income tax." Realizing the growing popularity of crypto currencies the government formed a committee this year in April to give recommendations for regulating the crypto currency market. The report is yet to come out. Sharma says, "No final decision has been taken but it is under active consideration."
Having said that, mining, buying and selling virtual currencies is not illegal in India, but it is also not recognised by law either. There is a question mark on the taxability aspect too. So if you have been trading or investing do make sure any gains from the sale of Bitcoins is included in your income tax return.