Investing in cryptocurrencies? Here’s how to show crypto earnings in ITR
New Delhi: Bitcoin, by far the best-known cryptocurrency, making headlines due to its record-shattering rally and then a correction as it entered 2021, has many investors flocking to cryptocurrency, an unregulated new-age asset.
However, there is confusion among many on how the earnings from investments in cryptocurrencies should be disclosed in the ITR as there is no clarity on it.
In India, the cryptocurrency industry is at a very nascent stage. A lot in terms of regulations and taxation needs to be done. Cryptocurrency earnings ought to be taxed as a short or long-term capital gain based on the duration they were held as an investment.
How is it taxed?
It is important to know that the gains derived from the sale of cryptocurrencies can be classified as either capital gains or business income. This classification will decide which tax return form one needs to file and how much tax will be levied on the gains.
In view of Section 2(14) of the Income-tax Act 1961, a capital asset means property of any kind held by a person, whether or not connected with his business or profession. The term ‘property’, though has no statutory meaning, yet it signifies every possible interest which a person can acquire, hold, or enjoy.
Kush Vatsaraj, Associate, TP Ostwal & Associates LLP said: “Cryptocurrencies and other crypto-assets are considered “property” for the purpose of the income tax law and gains arising from cryptocurrency transactions would be taxed in a manner akin to gains from trading or transacting in securities. If you are a regular trader in crypto and have a systematic, high volume of transactions, it is likely that your crypto income will be treated as “speculative” business income. Normal slab rates will apply, but there would be restrictions around setting off any crypto-related losses against incomes non-speculative business income.”
If, however, you are an infrequent or one-off investor in crypto-assets, then your gains would be treated as capital gains, and be classified as long term or short term based on your period of holding the asset – anything held for up to 36 months will be considered “short-term”. Short term gains will be taxed at normal slab rates, while long term gains at a flat 20%, Vatsaraj further explained.
The ambiguity and controversy regarding whether to classify income from transactions in speculative assets (like derivatives and options) as capital gains or as business income will extend to cryptocurrency transactions as well. Since there is no objective rule on what would constitute a “regular” trade or a “high” volume of transactions, it is best to consult a professional if you’re unsure about the classification of your gains, he added.
ITR filing for individuals, company
While filing ITR, individuals having taxable income more than ₹50 lakh have to mandatorily fill in Schedule AL in ITR forms, which contains information related to investments in mutual funds and securities, including cryptocurrencies.
Moreover, if a company or a partnership firm has made an investment out of their business funds into a cryptocurrency, then it is mandatory for them to show it in their balance sheet as they have to follow the accounting standards.
“If the requirement to fill in Schedule BS (Balance Sheet) or Schedule AL (Assets & Liabilities) in the ITR applies to you, the cryptocurrency held by you on 31st March, 2020 must also be appropriately disclosed, either as an investment or as stock-in-trade (if you are treating crypto-trading as a business),” Vatsaraj added.
It is also worth mentioning that for individuals who have capital gains or business income arising out of cryptocurrencies, ITR-2 and ITR-3 are the relevant forms for tax returns.