Crypto: budgeting to decide if investing in crypto is business income

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The government is looking to refine the definition of income and gains specifically for crypto assets in the upcoming budget.
This decision could significantly increase the tax burden for crypto investors.

The government has contacted senior tax advisers regarding the changes which will only affect crypto-assets and no other asset classes such as stocks.

This would mean that the income tax on investors’ or traders’ returns could reach 35-42% in the future.

“If the definition of income is changed in the tax framework, it could give the tax department the latitude to charge income tax on gains generated from investing in and trading cryptocurrencies. Some clarity in regarding taxation is needed around cryptocurrencies even though we don’t have a framework in place defining the asset class,” said Dinesh Kanabar, CEO of Dhruva Advisors, a tax advisory firm.

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

That is, Indians who have seen their cryptocurrencies appreciate over the year and have exchanged them for other crypto assets without converting them back to fiat or INR will also be taxed.

“Even if payment for an asset, say a painting or other crypto asset, is made in cryptocurrencies, it is still income in the hands of the recipient. As cryptocurrency has an underlying value in Indian rupees, it should be taxed as income,” said Sudhir Kapadia, National Tax Manager, EY India.

They can go on to buy another crypto asset from that money — or a cryptocurrency afterward, a person familiar with the development said.

Investors would be forced to calculate the actual returns of their crypto assets, every time they sell them, and pay taxes on that.

Apart from this, the government could also introduce the Goods and Services Tax (GST).

The government could impose 18% GST on crypto trading, and the amount could be borne by an individual 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 assets. Thus the GST will be levied at 18%, for private individuals it will be taxed at the highest bracket. If companies are dealing with revenue, they can show crypto investments in the other revenue bracket,” a person familiar with the development said.

The government plans to define cryptocurrencies as a commodity in the new bill which also proposes to compartmentalize virtual currencies based on their use cases.

“There is no preparation for the bill; the government is waiting for US policies to take shape, which is expected in the next 2-3 months. After the United States publishes its policies on crypto, India should decide on the way forward,” said one of the people familiar with the development.

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

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