How to File Tax Returns in India for Your Bitcoin Profits

There are at least four different ways to declare income from Bitcoin and other cryptocurrency investments in India.

Bitcoin is soaring in popularity and user adoption in India. It has been estimated that India now accounts for over 10 percent of the global Bitcoin trade. In the past 12 months, Bitcoin has witnessed a staggering growth of over 1,200 percent in value and remains a favorite among cryptocurrency enthusiasts pan-India.

However, it would seem that most Indian cryptocurrency investors are unaware about their income tax liability arising from any gains or earnings from their Bitcoin cryptocurrency transactions.

Bitcoin and other cryptocurrencies are an unregulated market in India. They are not illegal, but the RBI has on several occasions cautioned investors of inherent risks. The government of India is currently considering a framework on these digital currencies.

But in the meantime, anyone who earns any income in Bitcoin, needs to declare their income and pay taxes. That seems fair enough. But this is also where things start getting confusing for most people.

The fact is that, in the absence of any guidelines from CBDT, ICAI, RBI or the Income Tax Department, cryptocurrency investors from India are largely left to figure this out on our own.

As an early adopter to crypto, I was perplexed with the subject of accounting my income in cryptocurrency from blogging and consulting. During my research into this subject, I’ve interviewed professional tax consultants and an income tax official. He said:

Any income generated from illegal or legal activities including these new-age digital or cryptocurrencies needs to be declared by the individual earning said income and he or she is liable to pay tax on such gains or income earned from these new earning opportunities.

Income tax official

The fact is that the IT Act does not stop you from earning or profiteering from investments in cryptocurrencies and allows you to declare your gains and pay taxes on it. Therefore, as per a professional tax consultant, the four most common and safe ways of filing your returns after declaring your income from cryptocurrencies are as follows:

Capital Gains

If you are a casual investor in Bitcoins, any profit resulting from sale of your cryptocurrency is taxed as short-term capital gains as per your income tax slab rate. If your income exceeds Rs 10 lakh then there will be a 30 percent tax on the profits plus surcharge and cess.

Even though Bitcoin has not been declared as a capital asset in the absence of any government agency issued guideline, this seems to be the safest bet for most investors. Bitcoins similar to most other assets are usually owned with the expectation that the owner will gain from an increase in its future value.

Professional tax consultants seem to be favouring these parameters to consider Bitcoin as a store of value similar to a stock in a company as opposed to a mode of payment in order to make it easier to file returns for their respective clients.

In case of any long-term capital gains, the tax rate applicable is only 20 percent on your profits. The time period of the asset needs to be considered here while making an assessment and most auditors seem to be preferring to equate the time period of equity (minimum holding period of 2 years) to Bitcoins. You can also account for indexation to reduce your tax burden.

Business Income

If you are a Bitcoin trader with substantial and frequent transactions it could be considered as a business (trading) income. Here you can account for your profit and loss accordingly. CBDT in the past has issued a circular to distinguish when equity is held short-term as an investment versus a stock-in-trade.

Here, an applicable rate of income tax as per your income slab will apply. If your income exceeds 10 lakh rupees then the applicable tax rate is 30 percent plus surcharge and cess.

Professional Income

If you are a blogger, freelancer or consultant earning in Bitcoins, you may be wondering how to file your taxes for income from any services rendered to clients in India or abroad.

Allow me to give you my example. I’m a consultant paid in Bitcoin and also a professional blogger on Steemit.com. On Steemit, I earn in the cryptocurrency, ‘Steem’, which I then sell to purchase Bitcoin. Then, I use an Indian Bitcoin exchange such as CoinSecure.in or Zebpay to sell Bitcoin for Indian rupees and cash out my earnings. This is fully transparent as all Indian exchanges adhere to KYC norms.

Here, an applicable rate of income tax as per your income slab will apply. If your income exceeds Rs 10 lakh then the applicable tax rate is 30 percent plus surcharge and cess.

Income from Other Sources

What if you are mining Bitcoins? If you fall under this category of Bitcoin users then you are likely to be only selling and never purchasing any Bitcoins. This is somewhat similar to rendering services as a consultant and earning in Bitcoin with the only difference being that you are not a professional.

But there is a recourse.

You can declare your income from cryptocurrencies under, ‘Income from Other Sources.’ It is the fifth head of income which allows you to declare residual income or income that cannot be reported under salary, house property, capital gains or for that matter any business or profession.

You will taxed as per the Income tax slabs and if your income exceeds 10 lakhs, then the applicable tax rate is 30 percent plus surcharge and cess.

It is wise to declare your income from Bitcoins in your annual tax returns, and hire an excellent professional tax consultant to do your accounting if you plan on mining, earning or investing regularly in Bitcoins.

(Disclaimer: This is a personal experience of the author and should be treated as such. The author is not a financial adviser and this is not to be treated as financial advice! His blog can be found at Steemit.com/@firepower.)

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