Cryptocurrency exchanges are digital currencies that can be used to purchase goods and services in the same way that regular currencies can. However, it has been primarily controversial since its inception because of its decentralized nature, which means it operates without the use of any intermediaries such as banks, financial organizations, or central agencies. Reports cleartax.in
In today’s digital currency world, over 1,500 virtual currencies are traded, including Bitcoins, Ethereum, Litecoin, Doge, Ripple, Matic, and others. Financial experts have been debating whether cryptocurrencies should be classified as a ‘currency’ or an ‘asset.’ The terms cryptocurrencies and crypto-assets are often used interchangeably.
However, identifying it as a ‘currency’ requires government legal support; in the exclusion of this, it is appropriate to categorize it as an ‘asset/property.’ Because the tax implications would arise regardless of legality, designating them as “assets” would be a better method than waiting for a government explanation.
Legitimacy related to the taxation system
Because the Central Bank (RBI) has not yet legalized bitcoin, it is subject to taxation. An investor who makes money by selling bitcoin must pay the tax. All income is taxed unless it is specifically exempted by the Income Tax. Investors must pay tax on virtual currency depending upon the type of the transactions until we receive clarifications from the income tax department.
Gains would be taxable as (i) Business income or (ii) Cap gains under regular income tax regulations. Gains from bitcoin exchanges would then be taxed as ‘business income’ if there are consistent exchanges and significant volumes. They will, however, be taxed as ‘capital gains’ if the primary objective of possessing them is to gain from longer-term value appreciation with fewer trades.
Relatively brief cap gains tax is levied if crypto resources are kept for less by around three years (=36 months) under the corresponding income tax slabs. If crypto-assets are traded after 3 years (> 36 months), they will indeed be classified as long-time investments and subject to a 20% tax rate with indexation advantage.
If cryptocurrency transactions are declared under business income, the impact of the Service Tax (GST rules) must be considered. All direct and indirect expenditures on the selling of crypto assets will be recognized as deductions from profits. Profits will be coupled to other earnings and taxed at the applicable income tax slab rate. Because the government has yet to specify its tax treatment and the plan is still being debated, a standard rate of 18 percent may be applied in the future.
Individual taxpayers are not compelled to comply with this mandate because it only applies to businesses. However, everyone must record and pay taxes on their cryptocurrency gains.