This Article is From Aug 03, 2021

Is Income From Cryptocurrency Taxable? How?

The Income-Tax rules explicitly mention the incomes exempted from taxation, but there's no clarity whether they cover cryptocurrency

Is Income From Cryptocurrency Taxable? How?

The tax liability will depend on whether the cryptocurrency is held as a currency or an asset

After the Supreme Court reversed a ban by the Reserve Bank Of India (RBI) on trading cryptocurrency, many people invested in the speculative market. Some must have earned handsomely during the bull run earlier this year. Now, most people are not sure how their earnings from these digital currencies will be taxed or whether they are liable to pay income tax at all. Since these digital coins are not legal tender in India yet, there are no clear guidelines from the government. This is leading to confusion among crypto investors.

However, it is not advisable to avoid paying income tax on gains made through crypto investments. The Income-Tax rules explicitly mention the incomes exempted from taxation. So how would cryptocurrencies be taxed?

Nature Of Investment

The tax liability on cryptocurrencies will depend on whether they are held in the form of currency or as an asset. If traded frequently, earnings from the sale of crypto coins can be taxed as business income. If it is held for investment purposes, it comes under capital gains. Based on this classification, an assessee can file the relevant tax form and calculate the applicable tax liability. Income from cryptocurrencies can also be filed under ‘Income from Other Sources'.

According to Section 2(14) of the Income-Tax Act, any property held by a person – whether or not connected with their business or profession – is categorised as a capital asset.

Duration

The duration for which cryptocurrencies are held will be a factor in tax calculation. If the asset is held for more than three years, it is taxed as long-term capital gains. If held for less than that, it would be considered as short-term capital gains.

Crypto Mining

If a person has earned cryptocurrency through mining, and not by buying on the exchange, that would come under the self-generated capital asset category. It can be taxed as a capital gain. But – again – in absence of clear guidelines, it's best to consult your personal tax adviser before filing returns.

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