With India’s recent demonetization, more people are investing in cryptocurrencies. If you’re going to invest in cryptocurrencies, you might be wondering what the legal implications of doing so are and how to avoid a tax audit. This post will help answer these questions by explaining how Indian law classifies cryptocurrency and what documents you’ll need to have on hand before trading.
One important point worth mentioning is that while just using bitcoin is not illegal, trading it for other digital currencies or fiat (e.g dollars) would be taxable at the rate of 20% for capital gains under section 56(2)(j) of Income Tax Act 1961 as per Circular No 1/2017-Cus (DTE-1).
How does the Indian government define a cryptocurrency?
The Central Board of Direct Taxes in India has issued policy guidelines on how to treat cryptocurrencies tax. These guidelines have an effect of law because they were issued by the CBDT and took effect on July 21, 2017. Interpretation 139(6) to Section 2 (i) of the Income Tax Act was released in Feb. 2014 as well. This interpretation is much wider than the CBDT’s recent guidance and would include cryptocurrencies under the definition of “commodities” which is defined under section 2 (e) of I-T Act as goods, animals or vegetables that are or can be traded in market without any further processing.
The crux of the CBDT’s recent guidance is that cryptocurrencies are not a legal tender and so transactions involving virtual currency are not governed by the provisions of Foreign Exchange Management Act (FEMA) 1999. They also defined cryptocurrency as a digital asset and clarified that it does not include any physical coin or notes.
What are the taxation rules for cryptocurrency in India?
Cryptocurrency is neither currency nor money nor any kind of financial security under the laws of India. The nature of cryptocurrency, as mentioned above, is that it’s a property which is neither money nor security. In case of property (not money or security) transactions involving capital gains tax has to be paid under section 56(2)(j).
The rate of crypto tax in India is 20% for short term gains and 10% for long term gains. Short term capital assets are assets held for less than 36 months, and long term capital gains are assets held for more than 36 months.
What kind of documents do I need to keep?
Keeping all the required documents will be difficult, but it has to be done because the cost of compliance can be quite high if you get caught lying. If, however, you take proactive measures you can manage your risk. For example, in order to prove that your cryptocurrencies are not taxable, you would have to show that they’re not being used in India as currency by purchasing goods or services with them or else you will have to pay tax according to the measures set by CBDT.
You can file your crypto tax upon calculating the overall margin on your crypto assets. You can also use online software like Binocs which will automatically calculate and file the taxes for your crypto gains on time.