Your Guide to Tax Returns on Cryptocurrency

Cryptocurrencies are digital assets that can be used as a medium of exchange. These digital assets use strong cryptography to secure and conduct financial transactions and also regulate the production of the currency. There is no central authority to regulate this system as it is based on blockchain and distributed ledger technology.

When you make a transaction using a cryptocurrency on a blockchain network, the transaction is verified by nodes in the network that generate a cryptographical key to validate the transaction. Once a transaction is unanimously authenticated by all the nodes in a network it is added to a block, this block is added to a chain of transactions that are immutably linked to one another through strong cryptography. The blockchain shows the entire transaction history related to that currency.

Legality of cryptocurrencies in India

Over the past few years, India has been increasingly using technology like blockchain to fuel transactions. The RBI has noticed these developments and has reacted quite favorably to the adoption of these technologies. While India is moving towards a digital or cashless economy, cryptocurrencies still remain outliers.

In 2013 the RBI took notice of the increasing use of cryptocurrencies in India and cautioned holders, traders, and users against the use of such virtual currencies. Other regulators like Enforcement Directorate and the Income Tax Department were swift to take action and shut down businesses associated with cryptocurrency. In light of these developments, most entities dealing with cryptocurrencies stopped business operations from 2017 onwards. The RBI also prohibited entities regulated by it to transact in cryptocurrency. Even though the RBI has taken quite a firm stance against cryptocurrencies in India, it has supported the use of blockchain technology and distributed ledger technology in India and has also supported the development of a national digital currency, this is evidenced in the two reports from the RBI in 2017 and 2019.

After the budget speech in 2018, the government created an Inter-ministerial Council which included the RBI to examine

  • The status of cryptocurrencies in India and globally.
  • The existing regulatory structures in place for cryptocurrencies globally.
  • How to tackle issues related to consumer protection and money laundering.

Taxes on cryptocurrencies

Presently, in India, there is a total ban on holding, selling, dealing in, mining, generating, issuing, transferring, using or disposing of cryptocurrency. So information on cryptocurrency taxes is purely speculative. There are three main instances that can produce a taxable income from cryptocurrency transactions:

  • Transfer of cryptocurrency to fiat currency
  • Crypto-mining
  • Receiving payment in cryptocurrencies

Cryptocurrency exchanged for fiat currency

When a cryptocurrency is exchanged for a fiat currency, the price differential between the buying price of the cryptocurrency and selling price will be considered taxable income. The duration for which the cryptocurrency is held will determine the head under which it will be taxed.

Cryptocurrency held longer than 36 months are considered long-term capital assets, and therefore, any income arising from the sale of these assets will be taxed at a flat rate of 20% under the head Long-Term Capital Gains. Income arising from the sale of cryptocurrencies held for periods of less than 36 months or traded regularly will be considered a business income and will be taxed according to the appropriate tax slab.

Crypto-Mining

Even though crypto-mining is a capital intensive activity that consumes a lot of electricity and requires expensive hardware. The cryptocurrency generated as a result of mining is self-generated, and therefore, the cost of acquisition cannot be determined.

Even though Section 55 of the Income Tax Act, 1961 dictates the calculation required to be performed in case of self-generating assets, it does not include crypto-mining. Therefore, it is not clear how crypto-mining will be taxed under future regulations.

Receiving payment in cryptocurrencies

Many businesses use cryptocurrencies as a means to receive payments. Any payments received by a business for goods or services through cryptocurrencies will be considered a business income and will be taxed appropriately. Tax in such a case will be levied under the head of Profits or Gains from a business.

Cryptocurrencies could be the future of currency, and even though it is not clear as to how they will be taxed, it is a good idea to keep up to date with the latest developments when it comes to these digital assets.

Crypto-Tax Calculators

There are a number of platforms that have been designed to make crypto-tax calculation super easy and quick. Let’s take a look at 3 such platforms.

ZenLedger

ZenLedger is an easy-to-use crypto-tax calculation software that is freely available online. This power tool can help you create tax reports in seconds and auto-fill tax forms. The ergonomic design of the interface makes this app a favorite among crypto-traders and investors alike.

TokenTax

TokenTax was rated as the best platform for filing of cryptocurrency taxes by Forbes. This platform has partnered with all major crypto-exchanges allowing you to upload all your transaction information in seconds. Once all the transaction information is fed into this platform it will generate all the relevant tax forms.

BearTax

BearTax is considered one of the simplest crypto-tax software on the market. The platform is integrated with 25 exchanges that will allow you to import all your crypto-transactions within seconds. The software does not carry any charge for crypto-tax calculations, but there is a charge associated with the downloading of tax documents.

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