Can you file tax returns in India for gains from Bitcoin, cryptocurrency trades?

Anand Murali November 16, 2017 6 min

Cryptocurrencies are a grey area in India and there is no clear regulation about them so far but this hasn’t deterred many Indians from trading and investing in cryptocurrencies. Earlier this summer, New York bitcoin trade analyst Chris Burniske also tweeted about how trade in INR accounted for over 10% of the global Bitcoin trade volume.

Let that sink in: one-tenth of trades in an asset class of over $120-billion market capitalisation has an India connect. This is only Bitcoins. No one has a clear estimate of what percentage of trading in altcoins (short for so-called alternate cryptocurrency, used to refer to non-Bitcoin cryptocurrencies) has roots and destination in India; altcoins today have a market cap of over $92 billion.

This ambiguity in the legal status and regulation regarding cryptocurrencies haven’t stopped investors and traders, whose numbers are on a rise in India. A June 2017 news story said Delhi-based Bitcoin exchange Zebpay was adding over 2,500 new users a day.

This demand, not just for Bitcoins but also for altcoins like Ether, Dash, Monero and tokens from various ICOs, have also given rise to a handful of Indian cryptocurrency exchanges that deal with altcoins apart from the Bitcoin only exchanges.

With most exchanges in India collecting KYC (know your customer) details of customers, transactions on most exchanges are documented at their end.

But what happens to the gains made on the trades? Bitcoin prices have risen 10 times in the last 12 months; altcoins such as Ether 33 times and Dash 46 times.

The rules say that filing income tax returns is mandatory in India for those whose total income exceeds Rs 2.5 lakh. But unlike most income categories in the Income Tax Act, income from cryptocurrency trade is not detailed. We interviewed taxation experts and traders to see how they are treating income from the gains in cryptocurrencies.

Filing for taxes

“Documentation is the most important aspect of taxation and accounting. Regularly extract and save the transactions data from the trading platform you are dealing/trading with,” advises Yasaswy Sarma, a cryptocurrency enthusiast and Partner at chartered accountancy firm GPRSK and Associates in Chennai.

Taxation is all about proper declaration of transactions done by the trader, whether it’s resulted in profit or loss, Sarma says. The details he asks clients to document include date of transaction, transaction ID, transaction type, quantity, prices, platform details etc.

Now before you start with filing your taxes you have to ascertain whether you are falling under business category or as capital investor.

There are generally two distinctions that can be made based on the way you trade, Sarma says. “In general, if you are trading in cryptocurrencies on a casual basis and mostly for investment purposes, your gains/losses will be considered as investments under the capital gains,” he says. “Depending upon your trading cycle, if you are more of an active trader you will be considered under the business category.”

For day traders, who take advantage of price variations in a day or short time frame, the gains or losses fall under the speculative income category under business head.

Like any other business, cryptocurrency traders falling under this category will have to create a balance sheet and P&L or income statement for the respective financial year.

So, broadly, according to Sarma, you can pay tax on income from cryptocurrency trade as capital gains tax or business tax. The exact amount of tax you will have to pay will be based on the income slab of taxation you fall under.

Yasaswy Sarma, Partner at GPRSK and Associates
Yasaswy Sarma, Partner at GPRSK and Associates

Most of the traders and investors spoken to for this story have not yet filed their income taxes yet as they have started trading only this financial year. Also, several are yet to convert their cryptocurrency holdings into Indian rupees to reap the gains made. The two people who have filed for taxes have done so under the capital gains category have filed it under the ‘Others’ sub-category as there is yet no clarity whether cryptocurrencies will be considered a security, which many argue it is, or not.

Is crypto a capital asset?

Some question the view that income from cryptocurrency trading can be declared as capital gains because they believe cryptocurrencies are not a capital asset in the first place.

According to Shailendra Kumar, founder and CEO of TaxIndiaOnline, for any kind of gain to be categorised as capital gain, the asset in consideration has to be a capital asset and cryptocurrencies don’t fall under this category. “If you are going to declare something as capital gains, first of all it has to be a capital asset. Who has declared cryptocurrency as a capital asset? You are just presuming it,” says Kumar.

If someone wants to file tax returns, the income from cryptocurrency trade should be treated as income from business, insists Kumar, given that cryptocurrencies have not been identified or acknowledged as a legitimate asset or capital asset in India so far.

“If someone is trading in cryptocurrency and wants to declare it and pay taxes, the IT Act doesn’t stop you from doing that. In that scenario it (income from cryptocurrency trade) can be treated as profit from business. So, it’s a business income,” he says.

FEMA and other Regulation

Often, cryptocurrencies bought in India are transferred to exchanges abroad by traders to transact in altcoins that are not available on Indian exchanges. In such cases, rules under the Foreign Exchange Management Act (FEMA), which details laws for civilians dealing with foreign currency, may be applicable.

Those who are trading with money that has been accounted for and paying taxes may not have to worry about these transactions. But the central bank that lays down the rules for forex transactions or the Enforcement Directorate, which keeps a hawk eye for violations of FEMA or the Prevention of Money Laundering Act, might seek clarification regarding transactions.

“If someone wants to pay taxes, the Income Tax department will have no objection… they will welcome it. But, if the information is shared with other enforcement agencies , then the return filer may be liable to penal action,” says Kumar. It can be argued that the law doesn’t say anything about cryptocurrencies but the unpredictability of recourse will hang thick in the air.

Also, currently there is no regulation regarding accepting cryptocurrency as part of fees for goods or any other services provided, hence as a precautionary measure it is a good practise make sure that such transactions and their details are recorded.

 


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