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December 20, 2020

Selling Bitcoin? Know how much you have to pay Income Tax and GST in India

by CA Shivam Jaiswal in Income Tax

Selling Bitcoin? Know how much you have to pay Income Tax and GST in India

Bitcoin is a cryptocurrency, a digital asset designed to work as a medium of exchange that uses cryptography to control its creation and management, rather than relying on central authorities. Over the course of bitcoin’s history, it has undergone rapid growth to become a significant currency both online and offline. Bitcoin has seen its value skyrocket to around $18,000 after dropping down to around just $4,840 in mid-March. The most significant development that may be supporting a potential sustainable growth trend for Bitcoin is the ongoing adoption of cryptocurrencies.

Taxation is an important aspect when it comes to understanding Bitcoins. There is a lot of ambiguity regarding the legal status of Bitcoins, thus it is very important to understand how the bitcoin traders are tackling the imposition of taxes on it. However, if you are wondering how to calculate the tax on it, here is what you should know:

Are bitcoins legal?

Bitcoin, as a medium of payment, has neither been authorized nor been regulated by any central authority in India. Further, no set rules, regulations or guidelines are laid down for resolving disputes that could arise while dealing with bitcoins. Hence, bitcoin transactions come with their own set of risks. However, given this background, one cannot conclude that bitcoins are illegal as, so far, there has been no ban on bitcoins in India.

How are bitcoins taxed?

  • The concept of bitcoins being quite new to the Indian market, and the government has not yet brought taxability of bitcoins into the statute books.
  • At the same time, the levy of tax on bitcoins cannot be ruled out because the Indian income tax laws have always sought to tax income received irrespective of the form in which it is received.
  • The bitcoin tax differs based on your holding. The first step is to see whether you were trading in it or holding it as an investment.
  • If it is an investment, then one will have to pay capital gains tax.
  • If you are trading in bitcoins, then it is a business income. So, if your turnover exceeds Rs 5 crore, you are liable for tax audit.

How can one classify bitcoins as trading or investment?

  • The income tax department has not specified the classification for trading and investment.
  • Taxpayers will have to consider multiple factors such as duration, frequency of the transaction, time spent on it and the intention of the transaction.
  • All this will determine whether it is an investment or business income.

What tax is applicable if a person invests in bitcoins?

  • If you are an investor, you have to pay capital gains tax.
  • Capital gains can be either short-term or long-term.
  • There is no provision for bitcoins and other cryptocurrencies in the Income Tax Act. In the absence of any provision, it is assumed that the general provision will apply.
  • Hence, if investor holds bitcoins for less than 36 months, short-term capital gains will be applicable.
  • If investor holds bitcoins for more than 36 months, long-term capital gains tax (LTCG) will be applicable
  • Short-term capital gains will be clubbed with your salary income and taxed at slab rate. In case of LTCG tax, you will have to pay 20% tax, with the benefit of indexation.

Let us refer to an example below to understand how LTCG is computed on sale of bitcoins

Suppose Mr A purchased some bitcoin units in January 2015 for Rs 1,00,000 and sold them in May 2018 for Rs 5,00,000. The holding period is above three years. The gains are called long-term capital gains and are taxed at 20% with indexation benefit.

The long-term capital gains are:

Original cost of acquisition = Rs 1,00,000
CII (Cost of Inflation Index) in the year of purchase = Rs 240
CII (Cost of Inflation Index) in the year of sale = Rs 280

Indexed cost of acquisition = 280 * (1,00,000) / 240 = Rs 1,16,666.
The sale price of the asset = Rs 5,00,000

Long-term capital gains = The sale price of the asset – The indexed cost of acquisition.

Long-term capital gains = Rs 5,00,000 – Rs 1,16,666 = Rs 3,83,333.
Tax on long-term capital gains at 20% = Rs 3,83,333 *0.2 = Rs 76,667.

Is GST applicable on Bitcoins?

GST can also be imposed on bitcoins. For it to apply on bitcoins, they need to fall under the category ‘taxable services’ which are defined as “services to any person by any person, in relation to online information or database access or retrieval or both in electronic form through computer network”.

GST or goods and services tax is applicable on the supply of goods and/or services. The sale of bitcoins therefore would attract GST if it falls within the domain of either goods or services.

It could be inferred, that the activity of Mining (process of adding transaction records to the bitcoin’s public ledger called the Blockchain) could be considered as a ‘taxable service’ under the finance act, because mining is one of the ways a person can legitimately earn his bitcoins with his proof of work.

 GST on Bitcoin is very much a reality and those trading in the crypto currency should consider registration and compliance with GST. A contrary view , however, has been taken by several countries around the world which have either accorded the status of money to Bitcoin thereby exempting it from local GST. The government has not clarified in India the applicability of GST on Bitcoin still remains as per law of the land.

RBI banned cryptocurrencies in the year 2018 after several frauds. However, in March 2020 cryptocurrencies were declared legal in India. The government is holding talks with different ministries to bring in a law to ban cryptocurrencies.

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