Despite unclear regulatory uncertainty around crypto investing, tax planning for the same is particularly unnerving. It has been reported that government plans to amend the income tax law to bring digital coins under its ambit in the Budget Session of Parliament.
For the current Assessment Year 2021-22, tax advisors say gains from cryptocurrencies may be classified as capitals gains or business income depending upon whether the investments are maintained for purpose or trading. Those who dabbled in cryptos and made gains in the past year have to report the gains, if any, to their overall income.
“Purchase and sale of crypto can be broadly classified into two forms, basis it being considered by a trader or an investor. Accordingly, one can either pay taxes in the form of capital gains or classify it as business income and pay the taxes,” says Gaurav Dahake, CEO, Bitbns.
In the case of capital gains, if the holding period is less than 3 years, then short-term capital gains would apply as per the applicable income tax slab but if the investment period is more than three years then the long-term capital gain would apply and gains can be taxed at 20 per cent with indexation benefit.
“Taxation on cryptocurrencies should depend on the nature of investment, whether it is held in the form of currency or in the form of assets. Profits from the sale of cryptocurrency can be taxed as business income if traded frequently, or as capital gains if held for investment purposes,” said Amit Gupta, co-founder and MD at SEBI-registered income tax solution firm SAG Infotech.
“However, it needs to be noted that, if considered as business income, then the profit can be taxed as per the applicable income tax slab rates, but if it is held for investment purpose, then taxation can be the same as tax gain in the form of capital gains,” he added. It is to be noted that Union Minister Anurag Thakur, who was then MoS Finance, while responding to a question in Rajya Sabha in March 2021, had stated, that Section 5 of the Income Tax Act, 1961, the total income of an individual or entity is subject to taxation irrespective of its source or legal status. This means cryptocurrency gains are very much liable to tax as income from the same will be added to your overall income.
