India’s Income tax treatment of profits earned on Bitcoin/ cryptocurrency trades and mining is a big question for BTC and altcoins investors. Although Indian Ministry of Finance is formulating a policy to govern cryptocurrency trades but nothing is expected to come soon.
Is bitcoin a security or currency?
A tug of war is happening between SEBI and RBI on classification of cryptocurrency. RBI says that such instruments shall be classified as security instead of a currency whereas,
A regulatory official from Sebi said, “It (bitcoin) cannot be classified as commodity derivatives as per extant legal provisions,”
If Bitcoin is treated as a security, then the income earned from bitcoin trading will be chargeable under the Short/long term capital gains head accordingly. Listing benefits may be given after charging STT (Securities transaction tax) to the investors if the current exchanges are authorized or the security gets listed on the existing SEBI authorized exchanges.
If Bitcoin is classified as a currency/foreign currency, it will fall under the regulation of RBI. In this situation Bitcoin trading will treated as forex trading or currency trading and the pair has to be permitted by the RBI as residents of India cannot perform overseas forex trading.
Income Tax on Profits of Bitcoin Trading
Currently, CBDT has not issued any specific guidance pertaining to treatment of virtual currency trading gains. Irrespective of the legal status income tax department would want you to report all your incomes and pay taxes therefore, any person who is investing in bitcoins indirectly or directly shall report income earned from such transactions under below two options:
- We can treat the transaction as buying of capital asset for investment purpose and report the income on such transactions as long term/ short term capital gains. 36 months shall be the period of holding to determine the type of capital gain.
- Where investors transfer money to Indian exchanges which are not registered with any regulatory authority, to buy a bitcoin on behalf of them. Considering questions on the legality of transaction and being an indirect owner of the coin; an easy option is to report the income under the “Income from other sources” head and pay taxes accordingly.
There is no question of tax evasion in choosing either of the above option as both the other sources and short term capital gains (non STT paid) are clubbed with the total income of an individual and tax is charged as per his/her income tax slab. Tax implications on both the options remain almost same except when the capital gain is long term nature.
Income Tax on Mining of Bitcoins
Mining of Bitcoins involve earning of fees on processing and addition of transactions to block chain therefore such kind of a income is treated as profits from regular business and the same can be reported as income from ordinary business or profession.