Many of us have started to trade in cryptocurrencies. But, are you aware of the fact that cryptocurrency trading in India is being taxed. According to standard Income Tax Law, it states, all incomes are taxable, i.e., the income from any source, whether regulated or unregulated, is taxable.
Do I need to pay tax on cryptocurrencies?
Yes, it is taxable. As mentioned, the tax must get paid regardless of its legality.
Do I need to pay tax on profits of Airdrops or play-to-win games like Axie Infinity?
The tax is applicable in this case also. And it must get paid in the year in which the income has been generated.
Do I need to pay tax on crypto received as Payment for Services?
Cryptocurrency is a means of payment, and its nature of service (s) rendered do not change.
For instance, working as a freelancer and getting paid in cryptocurrency is taxable. The nature of the transaction is unchanged, i.e., you are getting paid as a service provider, which means it is a business activity. So it is taxable.
How to Calculate Income tax on Cryptocurrency Trading and Investing in India?
Trading and Investing are two different concepts. For understanding in-depth, we follow different trading strategies. Trading involves buying and selling crypto assets, making profits on the price change in a short period. Whereas investing can be short or long-term, concerning the investor's interest.
It is to note that the derivatives such as Futures and Options Trading are considered trading, not investment.
How to calculate tax as an investor?
Tax on investors is determined considering the time they have a holding of an asset.
Short-Term Capital Gain Tax (STCGT)
This slab depends on the total income generated in the financial year from sales of an invested asset within three years of the purchase.
Profit = Sales Price - Cost of Acquisition – Commission or Brokerage
Long-Term Capital Gain Tax (LTCGT)
If the investor plans to sell the asset after three years of acquisition, Long-Term Capital Gain Tax applies. For LTCGT, 20 per cent are the basic tax rate.
Here the taxpayer gets the profit of indexation.
What is Cost Inflation Index (CII)?
It is an index that tells the investor about the present value of the asset in consideration. The value seen is as the cost of acquisition. Therefore, the payable tax gets reduced to some extent. The CII is the same and flat for all capital assets. Moreover, there are no indices for different assets.
The CII can refer only to the case of LTCGT.
Profit = Sales Price – Cost of Acquisition – Commission or brokerage – (Cost inflation index * Cost of acquisition)
How to Calculate Tax on Trading?
The taxable income is the profit made on all trades in the financial year. Trading is similar to running a commercial business or undertaking. So, it creates business income.
Therefore, it is better to maintain the records of your profits and make calculations on the same day's price for avoiding price volatility confusions.
Receiving Crypto as a Payment for Business
While dealing, the payment can take several forms. The payer on the side doesn't pay you in fiat currency. Nevertheless, they can pay in assets such as gold, diamond, or even cryptocurrency.
Regardless of the medium of payment made, the taxes are owed by the Government of India; the Income Tax Act states, all incomes are taxable. When assumed hypothetically, if you receive the payment in Bitcoin of INR 100, it may get taxed up to 30 per cent, i.e., you are liable to show the profit of INR 70 and then invest it according to your interest.
In case when you invest the whole amount of INR 100, it means that you have invested the government's share without their consent or approval, and it may cause an issue when a higher official asks you about the extra source of funds invested until now.
GST on Crypto Payments
Generally, GST is the consumption-based tax, i.e., if you are purchasing cryptocurrencies in India, then GST applies to you. It is to note that the goods or services provided to foreign clients are considered as an export. Therefore, GST is not considered on exports made from India.
However, in terms of receiving payments in cryptos and converting them into INR from one of the crypto exchanges in India states that you are not getting money in form of a fiat currency, and therefore, you do not get the FIRC.
Laws for accepting cryptocurrency or any digital asset in exchange for the export made is not in place, and therefore, the GST is applicable.
Booking Loss During the Financial Year
Losses must be disclosed while filing the income tax returns. For investments in financial assets, you can have Capital Loss in the short and long term.
Filing Income Tax Returns
There are three forms that you must fill depending on the case, such:
- Only Investment - ITR 2: If only invested in cryptocurrency, you must file ITR 2 having the Capital Gains Tax and Salary.
- Crypto-related Business Entity - ITR 3: Intra-day Traders, Crypto Miners, or any full-time crypto-related work classifying crypto business must fill ITR 3. It includes everything from ITR 2 and your Business Income.
- Salaried Person with Other Income - ITR 1: In general, ITR 1 is for people with income less than 50 lakhs and includes Salary, Pension, or certain Rental Income(s). But if you have invested in crypto, it is advised to fill either ITR 2 or ITR 3, whichever category requirements you fulfil.
Is commission or referral income being liable for GST?
Yes, regardless of the INR 20 lakh limit GST exemption limit. Moreover, you may need GST registration to pay the GST.
I do not have my trading history. How can I get that?
It is advised to connect with the support of the cryptocurrency exchange on which you trade. The exchanges keep your ledger safe in case if asked by the officials for your transaction details.
Income Tax on Crypto-to-Crypto Trading
As discussed earlier, trading is a commercial undertaking, and therefore, the taxes do not come into the picture. The Net Profit or Loss, calculated during the year after cumulating all the Sale and Purchase Transactions, is the amount on which the tax will be levied.
You should compute the loss and profit transactions separately, i.e., the profit will be taxed, and the loss can be carried forward to the next financial year.
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