The government recently extended the deadline for filing income tax returns for the financial year 2020-21 to September 30. According to the Income Tax Act, a person, who has an annual income of more than Rs 2.5 lakh or who has received a payment on which tax was deducted at source, needs to file an ITR, disclosing all earnings. But cryptocurrency investors are now not sure how they should file their ITR in absence of a clear guideline to classify earnings from the virtual currencies.
After the Supreme Court lifted RBI's ban on cryptocurrencies, many Indians began investing in this speculative market with an aim to make a windfall during bull runs of Bitcoin, Dogecoin and others in the recent past. Some of them must have earned handsomely, but how these earnings can be disclosed is now becoming a task for them.
According to Section 2(14) of the Income-Tax Act, 1961, a capital asset is any kind of property held by a person, whether or not connected to his business or profession. So, taxation experts believe, gains from cryptocurrencies too are taxable.
If they are, then these gains can be classified as either capital gains or business income. This classification will decide which tax return form an assessee should file and how much tax will be levied on the income. Income from cryptocurrencies can also be highlighted under ‘Income from Other Sources' while filing the ITR.
The calculation of tax levied on cryptocurrencies will take into account the period of holding. If investors hold cryptocurrencies for 36 months or more, the gains could be taxable as long-term capital gains, and less than 36 months, it would be short-term capital gains.
Short-term capital gains are taxable according to the slab rates applicable to a taxpayer, but long-term capital gains are taxed at a flat rate of 20 per cent. For individuals who have capital gains or business income from cryptocurrencies, ITR-2 and ITR-3 should be the relevant forms for filing tax returns.
However, a lack of clarification on crypto taxation may result in disputes and it's better to consult your tax advisor before you disclose your crypto earnings on ITR forms.