There is not enough clarity on whether cryptocurrencies must be treated as capital assets or whether the gains must be classified as income from other sources, said Archit Gupta, founder and CEO of Clear Tax.
Is it legal? The legality around cryptocurrencies has witnessed its own whirlwind. While both the government and Reserve Bank of India (RBI) have expressed dislike for cryptocurrencies many times, RBI went a step ahead in April when it asked all lenders to not maintain any business relationship with cryptocurrency exchanges. The government and RBI were dragged to court for this. RBI has also cautioned investors to abstain from purchasing cryptocurrencies, said Archit Gupta, founder and chief executive officer of www.cleartax.com, a tax returns e-filing and enterprise compliance service provider.
There is not enough clarity on whether cryptocurrencies must be treated as capital assets or whether the gains must be classified as income from other sources, said Gupta. A capital asset is usually something which, when held for significant time, appreciates in value. If these gains are considered capital gains, for taxation purposes, one has to classify them as short-term or long-term capital gains. As period of holding for this is not specifically defined, they may be considered long-term when held for over three years; if cryptocurrencies are held for less than three years, short-term capital gains tax may be applied.
Income from other source
As tax must be paid on gains from cryptocurrency, they may be preferably classified as ‘income from other sources,’ said Gupta. In some cases, cryptocurrencies may also be considered as foreign assets and that may require separate disclosure from certain class of taxpayers (those with total income over ₹ 50 lakh in a financial year), said Gupta. “It is recommended whatever gains have been earned must be disclosed in the tax return and tax paid on them. In some scenarios where there is frequent trading or significant holding it becomes imperative to discuss tax implications in detail with an expert."
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