Budget to decide if crypto investment is business income

The move could substantially increase the tax burden of crypto investors.

The government is looking to fine-tune the definition of income and gains specifically for crypto assets in the upcoming budget.

This would mean that the income tax on returns for investors or traders could be as high as 35% to 42% going ahead.

The government has reached out to senior tax advisors regarding the changes that will only impact crypto assets and no other asset class such as equities.

“If the definition of income is changed in the tax framework then it could give leeway to the tax department to charge income tax on any gains accrued from investing and trading in cryptocurrencies. Some clarity as far as taxation is concerned is required around cryptocurrencies even if we don’t have a framework in place defining the asset class,” said Dinesh Kanabar, CEO, Dhruva Advisors, a tax advisory firm.

The government is also looking to articulate how returns are calculated for crypto investors.

That is, Indians who have seen their cryptocurrencies appreciate during the year and have traded them for other crypto assets without converting them back to fiat or INR will also face taxation.

“Even if the payment for any asset, say a painting or another crypto asset, is made in cryptocurrencies, it’s still an income in the hands of the receiver. As cryptocurrency has an underlying value in Indian rupee, it should be taxed as an income,” said Sudhir Kapadia, national leader-tax, EY India.

Investors would be made to calculate actual returns on their crypto assets, every time they sell it, and pay tax on that.

They can continue to buy another crypto asset from that money – or crypto currency thereafter, said a person close to the development.

Apart from that the government could also bring in Goods and Services Tax (GST).

The government could slap 18% GST on crypto trade, and the amount could be borne by an individual who’s buying it if the exchanges decide to pass it on to them.

“The government is considering a tax proposal that will allow it to tax all crypto holdings. So GST will be levied at 18%, for individual holders it will be taxed at the highest bracket. If companies are dealing in income they can show crypto investments in the other income bracket,” said a person aware of the development.

The government is planning to define cryptocurrencies as a commodity in the new draft bill that also proposes to compartmentalise virtual currencies on the basis of their use cases.

“There is no preparation for the bill; the government is waiting for the US policies to take shape, which are expected in the next 2-3 months. After the US releases its policies on crypto, India is expected to decide its way forward,” one of the persons close to the development said.

Currently, there is no clarity either on direct tax or indirect tax when it comes to cryptocurrencies. This is mainly because it’s not defined either as currency, asset, commodity or service.