Love it or hate it: the sale of bitcoins in India is surging ahead, and even financial experts are not able to predict its behaviour.
Despite RBI warning all Indian citizens against trading bitcoins, and threatening to impose anti-money laundering and terrorism laws, the sale & exchange of bitcoins in India is at an all-time high, thanks mainly to demonetization move.
Now, the big question is: what about income tax payable on the profits made from the sale of bitcoins? Should the bitcoin trader classify it under short-term capital gains or it should be considered as long-term capital gains, aka equity shares and stocks?
Or rather, is there any mechanism to tax bitcoin profits in India?
When the very basic legal status of bitcoins is ambiguous and changes every fortnight, it is indeed interesting to know how bitcoin traders are dealing with the tax issues.
We present before you, few expert opinions and what Income Tax is saying on this issue.
Bitcoin: Business or Investment?
The most common and diplomatically safe assumption, at this point in time, is that bitcoin trade is a business, and just like any business, income tax needs to be paid on the profit made from buying and selling of this virtual currency.
For instance, Harshal Kamdar, tax partner at PwC India explains that in the absence of any clear-cut guidelines from Income Tax Dept., it is logical to classify bitcoin enthusiasts into two segments: a trader who buys and sells bitcoins as commodity, hence, ‘capital gains’ is implied, and tax should be paid accordingly; a businessman who provides platform for trading bitcoins, and any income derived from this business should be taxed as ‘business income’.
Benson Samuel, who is the co-founder of a trading platform for bitcoins in India supports this logic, as he says that any income from the sale of bitcoins on their platform goes directly to the bank account holder, hence, proper taxation applies on the transactions, just like any other stock trade.
Income From Bitcoin: Long-Term Or Short-Term Capital Gains
Now, if we assume that profit from bitcoin is indeed taxable, the niche question remains unanswered: which tax should be applied on profits from bitcoins?
Some reports have emerged wherein professional bitcoin traders have declared income from bitcoins as ‘income from other sources’ while filing tax returns. This makes the tax applicable as per the slab of income generated.
But some analysts are saying that income from bitcoins should be treated like ‘long term capital gains’, which makes it taxable at 20% plus indexation (if applicable).
Nishith Desai, who is the founder of an international law firm which works with bitcoin platforms said, “Given the wide nature of definition of capital assets under Section 2(14) of the I-T Act, the purchase of bitcoins, if it has been made for the purpose of investment, should be treated as a capital asset. Thus, any gains arising on transfer (ie: sale) should be characterised as capital gains.”
Under capital gains, there are two aspects: short-term capital gains is taxable as per relevant Tax-slab, which is 30% on income more than Rs 10 lakh.
Long term capital gains tax is 20%, but the time-period for investment should be at least 12 months. Hence, if a bitcoin trader holds his investment for a year, then it can be legally classified as long-term capital gains.
But as the status of bitcoin is unregulated, and to some extent, illegal, can bitcoin traders use long-term capital gains tax bracket?
An unnamed income tax official has clarified that a committee is right now determining the framework for virtual currencies in India.
He said, “That said, even if bitcoins were illegal, income earned needs to be declared and tax paid..”
Until and unless a legal framework and regulation are finalised, such confusion will continue to exist.
If you are a bitcoin trader or platform provider, then so share your views on the taxation aspect, by commenting right here.