Cryptocurrencies are digital currencies. Although they cannot be transacted physically as paper currency, cryptocurrencies are digital assets that can be transacted from person to person digitally. In recent years, cryptocurrencies have gained a lot of popularity due to the hype of Bitcoin.
Despite their popularity, cryptocurrencies are not yet legalized across many countries in the world. But that doesn’t mean their transactions are illegal. Cryptocurrencies are not legal, indicating that they cannot be accepted as a currency while purchasing any goods and services within the country. Their transactions and trading are not prohibited. In fact, crypto trading is done just like share trading in the stock market. Coinbase is one of the popular crypto exchanges which allows people to buy and sell crypto.
India is the country with the highest number of crypto owners in the world with more than 10.03 crore people. Although crypto is not legalized in India, it is not completely banned as well.
If crypto is not legalized in a country like India, then don’t make a mistake by thinking income earned from crypto trading would be free from tax.
Unfortunately, it is not the case! Tax will be imposed on the income earned from crypto transactions. This article helps you understand how the tax system works on crypto transactions. Click here to understand its impact on businesses.
How does the tax system work on cryptocurrencies?
Crypto currencies can be acquired in two ways either by buying in crypto exchanges or by mining.
Mining is the process where an individual called a miner uses computing to mine new crypto coins. Mining is done by solving some complex algorithms, codes, or mathematical problems. When a miner successfully mines a crypto coin, he would be rewarded with some part of the crypto and the other part will be circulated through crypto exchanges.
Taxes work in just one-way during crypto trading. In the sense that, you will not have to pay any tax while buying a cryptocurrency but you have to pay the tax when you receive income by selling cryptocurrencies from your end. If you get an amount in your bank amount while selling cryptocurrencies, this amount will be taxed.
Tax system further works in two different ways based on time period. If you have generated profits by selling cryptocurrencies before 36 months of buying it, then the income is categorized as other income in the tax form. Pay as per then your tax bracket will be imposed on the profit generated.
On the other hand, if the crypto is held for more than 36 months and you generate profits by selling it later then the gain is listed under long-term capital gain tax and it will be subjected to tax at the rate of 20% combined with applicable surcharge and cess post-induction. Here, your tax amount will be decided after adjusting the calculation index which reduces the tax amount reduced. Inflation index is calculated based on cost inflation released by the Central Board of Direct taxes annually.
History of crypto in India
Despite being the country with the highest number of crypto owners, the Indian government did not seem to have any special interest in crypto. In 2018, the Reserve Bank of India totally banned banks and other financial institutions which facilitate crypto transactions. But in 2020, RBI has taken back the restriction allowing crypto transactions between exchanges. But the government made it mandatory for the institutions to disclose profits and losses generated in transactions.
The Indian government is yet to regulate the crypto transactions. A bill on crypto transactions is expected to be passed very soon which might impose new rules and regulations on crypto trading.
As of November 2021, no official bill has been passed by the government of India imposing regulations on Bitcoin. But the finance minister, Nirmala Sitaraman had announced the Indian government is going to take a step to regulate crypto transactions.
There are many speculations being generated after this announcement. People are distributed on both the left wing and right wing. Some speculations say that government might ban crypto transaction once again as there can be scope of many illegal actions as crypto transactions doesn’t reveal sender and receiver identity to anyone. On the other hand, there are numerous people supporting crypto and expecting the government to bring required regulations on crypto transactions to avoid illegal actions and taxes imposed on crypto transactions.
Being the country with the largest crypto owners, Indian government might favorably take actions to regulate the flow but not ban it completely. Although crypto transactions are anonymous, most of them use blockchain technology which is decentralized and distributed data over multiple systems transparently. Considering this fact, the Government might probably ban private cryptocurrencies and bring regulations on public cryptocurrencies. If that happens, we can expect some significant change in taxes imposed on crypto transactions.