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According to the Economic Times, the Indian government is planning to compartmentalize virtual currencies and their tax treatment based on their use cases —payments, investment, or utility. Although the Reserve Bank of India (RBI) has not granted legal tender status to Bitcoin and other cryptocurrencies, it is eager to charge tax on cryptocurrency investment gains.

As cryptocurrency is gaining popularity in India as an investment and a means of payment by companies for products and services, this brings in the question of how to pay taxes on those types of transactions.

“Cryptocurrency gains could happen from multiple ways such as mining, staking, farming, or conventional buying and selling,” said Edul Patel, co-founder, and CEO of San Francisco-headquartered cryptocurrency trading platform Mudrex.

Gains from trading digital assets could be categorized under ‘business income’, while other activities would likely fall under ‘income from other sources.’ Patel warned that bringing in additional rules or amendments would needlessly burden the taxpayer.

While it’s not yet clear that the Indian government will set out a regulatory framework for virtual assets, it has provided some transparency provisions.

Since this April, the Indian government has made it mandatory for companies dealing with virtual currencies to disclose profit or loss incurred on crypto transactions and the amount of cryptocurrency they hold in their balance sheets.

“The gains resulting from the transfer of cryptocurrencies/assets are subject to tax under the head of income, depending upon the nature of holding of the same,” explained Anurag Singh Thakur, the then-minister of state for finance.

Cryptocurrency can be classified as an investment asset or business income

A digital token is deemed to be a capital asset if it is purchased for investment, which means it is bound to be taxed under capital gains. These investments are categorized into long-term or short-term capital gains, depending on the holding period.

Any gains after holding a cryptocurrency for 36 months or more would be taxable as long-term capital gains, while gains accrued during a shorter period would be categorized as short-term capital gains.

The tax rate under the long-term category can decline once the indexation benefit is applied, which allows the investor to adjust for inflation during the period these investments were held. Every year, the Central Board of Direct Taxes releases the cost inflation on which these assessments are done.

On the other hand, if a trader carries out cryptocurrency transactions frequently, any profits thereon would be taxable as business income.

India’s cryptocurrency bill could require more disclosure

As cryptocurrency regulations in India remain ambiguous, a growing number of Indians are accessing digital tokens by buying and selling on foreign platforms, which may have better features and customer service. If Indian authorities warm to the crypto token market, however, that could pull some of that business back to domestic crypto exchanges.

By July reports, the Indian government may levy the 18% Goods and Services Tax (GST) on transactions on foreign cryptocurrency exchanges to level the playing field with domestic ones. India has also reportedly considered a 2% equalization levy on transactions with foreign crypto exchanges. For Indian cryptocurrency exchanges, the 18% GST is charged as the trading fee to customers, which is similar to the setup for stock brokerages.

In the winter session of the Indian parliament, the country’s first cryptocurrency legislation is likely to be presented. The Cryptocurrency and Regulation of Official Digital Currency Bill is expected to contain disclosure requirements for income tax returns for crypto holdings in India as well as on foreign crypto exchanges by Indian residents.

This may allow the government to regulate cryptocurrency transactions, and the legitimacy provided to digital tokens could give investors more confidence in the sector.

Many crypto experts believe that regulating cryptocurrency will generate additional tax revenues for the Indian government. They expect the Indian government may introduce special income tax rates to tax profits from cryptocurrency transactions and may identify such transactions through recognized platforms only.

According to blockchain data firm Chainalysis, Indians had parked nearly $6.6 billion in cryptocurrencies as of May this year compared to around $923 million in April 2020.

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