Tax implications of investing in cryptocurrencies — here’s how you can make the most of your investment

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Tax implications of investing in cryptocurrencies — here’s how you can make the most of your investment
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  • Everyone who earns over ₹ 2.5 lakh has to pay income tax in India.
  • The Indian Finance Ministry has clarified that earnings from crypto investments are not exempted.
  • The extent of liability could vary based on taxpayer profile.
Bitcoin has come a long way – from being ignored by the financial world, to a global company like Tesla holding $1.3 billion as a digital asset. Cryptocurrencies can be used for transactions and even be held as assets. This unique nature makes it a particularly attractive investment.

Several investors have entered the ‘rich list’ and made billions, by investing in cryptocurrencies and associated services. And, a retail investor can accumulate more of this asset when they ‘ mine’ for it.

Others looking to dip their toe in the crypto market, may be wondering how profits for investing in cryptocurrencies are taxed — if at all. Here’s a quick look.

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Why pay taxes on crypto gains?



Laws and regulators move slower than technology, illustrated at every step of the Internet’s advances. This is true in India as well with guidelines slowly changing to let retail investors participate in cryptocurrency, and allowing banks to send money to crypto exchanges. India’s central bank, the Reserve Bank of India (RBI), has indicated that trading in digital currency is allowed but has warned investors of the potential risks.

The RBI has major concerns with respect to private cryptocurrencies. We have conveyed these concerns to the government. The government will examine the issue and act accordingly.

Reserve Bank of India (RBI) governor, Shaktikanta Das, during the RBI’s Monetary Policy press conference on 6 August 2021

India’s tax laws have yet to catch up, so consultants rely on interpreting existing laws in a grey area. However, the Indian MoS for Finance Ministry, Anurag Thakur, has made it clear that crypto earnings are taxed since it is not specifically exempted.
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Tax implications of investing in cryptocurrencies — here’s how you can make the most of your investment

Disclosing gains and paying applicable taxes helps you to minimise tax compliance hassles. I recommend evaluating your current liability, even if you think laws may change soon in a fluid financial world.

Mr Charan G from the Commercial Taxes Department of Andhra Pradesh State

Who needs to think about paying taxes?



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In brief, everyone who receives profits in hand. Earning from cryptocurrency in any form is not listed in the income categories exempt from tax. To clarify, income taxes are only applicable to gains received in hand.

So, if one invested ₹10,000 into Bitcoin and the coin’s price tripled since then, that gain is theoretical — with no tax due. Similarly, if a Bitcoin miner mined a certain number of Bitcoin but has not sold it for monetary gain in rupees, the Bitcoin held has only theoretical value, with no tax due on it.

But if you ‘cash out’ by selling some of that coin at a profit and receive rupees in the bank, the profit you gained is now taxable.

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When should you think about paying taxes?



If you have cashed out partly or wholly and a profit has reached you, you need to consider your tax liability.

If you had invested a certain amount that continues to grow – and you haven’t pulled that money out – you do not have to think about taxes yet. Because of long-term capital gains tax (LTCG) — explained further below — the longer you stay invested, the less tax you pay.

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How much would you need to pay?



There are no specific tax laws for cryptocurrency in India yet, but there are existing paths that guide us.

Personal Income (a)

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For relatively small profits, gains from cryptocurrencies can be listed under “other income” in the tax form, and pay as per the tax bracket applicable.

Personal Income (b)

For relatively larger profits from cryptocurrency, it would be advantageous to note it as an investment holding, and pay capital gains tax accordingly. Investments held for less than three years would be subject to short-term capital gains tax (STCG). In this case, STCG tax would be paid at the same income tax bracket a person already is in for that year.

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If an investment is held for more than three years before cashing in, the profits would be subject to long-term capital gains tax (LTCG). In this case, the applicable LTCG tax would be 20%. If a person is in a higher tax bracket than that for the year, LTCG would be preferable.

Business Income

You would pay taxes as usual, including for realised cryptocurrency gains. You can deduct expenses incurred by the business, thus lowering tax liability. If your main business was to mine cryptocurrency, you could deduct expenses incurred towards mining.

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The maximum and minimum tax liability



To summarize, the maximum tax liability you are accountable for is the income tax bracket applicable to your earnings. The income tax payable could be zero, if net income is less than ₹2.5 lakh after applicable deductions and if no LTCG tax is applicable, for individuals aged below 60 years.

At the other extreme, there may be losses that were released after cashing out of a cryptocurrency investment during a market dip. That loss could still be useful, but in a different way. Those who file tax returns for their business (Form 3 or 4 in India) may be able to offset losses against income in a future year, on a Chartered Accountant’s advice.
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We have barely entered the second decade of cryptocurrency as an appreciating asset, and the markets are still learning how to harness it. Individuals who understand their risk appetite can get the most out of such an investment. While we have explained that Bitcoin is subject to tax in India, this is not intended to be financial advice. We recommend making any major decisions after speaking to your tax consultant.

For a more in-depth discussion, come on over to Business Insider Cryptosphere — a forum where users can deep dive into all things crypto, engage in interesting discussions and stay ahead of the curve.

SEE ALSO:
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