How to calculate and pay tax on bitcoin profit?

Manoj recently sold a bitcoin for Rs 325,000 which he had purchased few months back, but he is not sure about the tax he has to pay or how this income or a gain needs to be declared in his tax returns. Like Manoj, there are many who had purchased and booked some profit due to the recent market euphoria and are now clueless about handling the taxation part. Let’s understand:

Is the gains on your bitcoins sale tax free?

At this moment, the clarity with respect to how the gains on bitcoin sale would be taxed is not there as our tax laws are yet to include provisions with regards to taxing virtual currencies. But the taxpayer needs to be informed that our income tax laws contain provisions which has the power to include different types of income for taxation purpose. It does not depend in which form you had received that income and it will be tagged under any of the five heads of income as specified under the laws. There are five heads of income – under the head salary, house property, capital gains or profit and gains from business & profession and the last one is income from other sources. This last head – income from other source – includes every sort of income which could not be taken under any other four heads.

So, under which head bitcoins profit will be taxed?

At this moment, our government and the committee is working on the regulatory laws relating to the bitcoins, and contrary to popular perception bitcoins are not illegal. What it means is that bitcoins or any other cryptocurrencies are not regulated at this moment till the time a notification is issued by the government. So we need to wait for government’s directive in terms of regulating all cryptocurrencies and a notification or a rule stating the asset class which bitcoins and other cryptocurrencies will be taxed. Let us look at the different possibilities of taxing the profits on bitcoin sale under different circumstances based on reason behind buying or dealing in bitcoins:

Bitcoins purchased for investment:

In case you had purchased a bitcoin in order to cash on the price appreciation it has seen, then it becomes your capital asset as defined u/s 2(14) of the IT Act. So any gains you make on sale of bitcoins will become your capital gains and classified under short-term or long-term gains. The period for which you would have held those bitcoins decides the nature of the gains.

If you would have sold your bitcoins after holding three for three years or more then you need to pay long-term capital gain tax @20% and you will be eligible to claim the indexation benefit. Whereas if the bitcoins sold by you were held for less than three years then you it will be treated as a short term capital gain and you need to pay taxed based on your applicable tax slabs.

Regular trading – buying selling of bitcoins:

If you are frequently buying or selling bitcoins then you become sort of a trader and the way we treat the profit on your bitcoin sale would change. The gains in this case would be treated as your business income taxed as per your tax slabs. Now what defines this “frequent buying selling” is not yet clear so the applicable laws and rules under the IT Act with respect to taxing the income from profits and gains of business shall apply.

Since there are no guidelines from the government on taxing the gains from the bitcoins sale, you can pay the tax on your gains by treating the gains as your income from other sources. The government is working on the legality and regulation relating to dealing in any cryptocurrency and we may expect an announcement or a notification soon to remove the uncertainty revolving around bitcoins sale, profits and its taxability thereby.

HOLDING PERIOD DECIDES

• If you would have sold your bitcoins after holding three for three years or more then you need to pay long-term capital gain tax @20% and you will be eligible to claim the indexation benefit
   
• Whereas if the bitcoins sold by you were held for less than three years then you it will be treated as a short term capital gain and you need to pay taxed based on your applicable tax slabs.

The writer is a chartered accountant and chief gardener, Money Plant Consultancy