How to disclose cryptocurrency gains while filing income tax return

Driven by the bitcoin rally last year and the Supreme Court of India lifting the Reserve Bank of India’s ban on cryptocurrencies, many investors in India took to investing in virtual currencies with hopes of making windfall gains. We tell you how earnings from cryptocurrencies should be disclosed in an ITR form.

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First, it's important to know that the gains derived from the sale of cryptocurrencies can be classified as either capital gains or business income. This classification will decide which tax return form one needs to file and how much tax will be levied on the gains.

In view of Section 2(14) of the Income-tax Act 1961, a capital asset means a property of any kind held by a person, whether or not connected with his business or profession. The term 'property', though has no statutory meaning, yet it signifies every possible interest which a person can acquire, hold or enjoy.

“Therefore, bitcoin could be deemed as capital assets if they are purchased for the purpose of investments by taxpayers. Any gain arising on transfer of a cryptocurrencies shall be taxable as capital gains. However, if the transactions are substantial and frequent, it could be held that the taxpayer is trading in cryptocurrencies. In this case, the income from sale of cryptocurrencies would be taxable as business income," said Naveen Wadhwa, deputy general manager, Taxmann, a research and advisory firm.

However, as far as India is concerned, you would not find any business dealing in cryptocurrencies. “You will find brokers and investors, who deal regularly in stocks and commodities, but when it comes to cryptocurrencies, you would never find any broker who is holding a virtual currency as a stock in trade," Wadhwa added.

Therefore, the gains made from investing in bitcoins or virtual currencies are taxable as capital gains, and to calculate capital gains, one needs to first calculate the period of holding. If investors hold cryptocurrencies for 36 months or more, the gains would be taxable as long-term capital gains (LTCG), and less than 36 months, it would be short-term capital gains (STCG).

“Short-term capital gains are taxable as per the slab rates applicable to a taxpayer. And long-term capital gains are taxed at the flat rate of 20% with the benefit of indexation," Wadhwa added.

When it comes to filing ITR, individuals having taxable income more than ₹50 lakh have to mandatorily fill in Schedule AL in ITR forms, which contains information related to investments in mutual funds and securities, including cryptocurrencies.

Moreover, if a company or a partnership firm has made an investment out of their business funds into a cryptocurrency, then it is mandatory for them to show it in their balance sheet as they have to follow the accounting standards.

On taxability of bitcoins earned during the 'mining' process, Wadhwa said, “Bitcoins generated during the 'mining' process are classifiable as self-generated capital assets. Since, the cost of acquisition of such Bitcoins is not available, the taxpayer can take the benefit of judgment of the Supreme Court in the case of B.C. Srinivasa Setty [1981] 5 Taxman 1 (SC). In this case it was held that if cost of acquisition of an asset cannot be ascertained, the machinery provision for computation of capital gains will fail, therefore, no capital gains can be levied on transfer of such assets. Therefore, Bitcoins generated in the 'mining' process may be exempt from tax."

However, such a stand may invite litigations as the revenue department may not accept it as a capital receipt, he added

Keep in mind that for individuals who have capital gains or business income arising out of cryptocurrencies, ITR-2 and ITR-3 are the relevant forms for tax returns.