Cryptocurrency has been under the limelight for the past few days because of some factors such as the dramatic rise and fall of prices, views of certain high-net-worth individuals and actions taken by various governments.
As cryptocurrency lures the high returns, therefore many Indians have invested in cryptocurrencies such as bitcoin, ethereum and dogecoin. Such investors must make an appropriate choice while preparing their tax return, they must make appropriate disclosure of the income earned from the sale of cryptocurrencies.
Treatment for income earned from investments in cryptocurrency is neither stipulated by the Income Tax Act, 1961 nor by the Central Board of Direct Taxes. Under the Act, income earned from the sale of cryptocurrency can be taxed either as income from capital gains or as profits from business or profession. The classification of income is based on the fact that whether an individual holds cryptocurrency, as an investment or stock-in-trade, or not.
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Cryptocurrency in its generic meaning gives the holder exclusive rights to access/spend and may likely be qualified as a financial asset, as the Indian regulatory framework does not consider them legal tender.
The Act defines any kind of asset, interest as a capital asset, and cryptocurrency is not specifically excluded from the definition of a capital asset. As cryptocurrency is held in an electronic wallet it becomes fungible, which leads to issues with identifying which trance of purchase is being sold and the cost of acquisition.
Taxpayers who hold the cryptocurrency as stock-in-trade may be considered traders. A person qualifies as a trader or investor based on aspects like – frequency of buying and selling, period of holding and intent of investment.
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When a taxpayer qualifies as a trader or an investor, any income earned from the sale of cryptocurrency shall be taxed as income from business or profession. As the cryptocurrencies are also regarded as assets, taxpayers shall include cryptocurrencies as the said Schedule.