Do I Need to File Taxes for My Bitcoin Returns?

The legal status and regulation regarding cyptocurrencies are in an ambiguous state in India but this hasn’t deterred trading and investing in cryptocurrencies. According to Chris Burniske, a New York Bitcoin trade analyst, it was revealed how Indian trade comprised over 10% of the global Bitcoin trade market. Number of investors and traders are on a rise in India. Based on a Delhi-based news report, Bitcoin exchange Zebpay is registering over 2,500 new users per day.

The rise in demand for Bitcoins, altcoins like Ether, Dash, Monero and tokens from various ICOs have also given rise to many Indian cryptocurrency exchanges that deal with both altcoins and Bitcoins. Transactions on most exchanges are documented at their end collecting KYC (know your customer) details of customers. In the last 12 months, Bitcoin prices have raised 10 times, Ether 33 times and Dash 46 times. As per rules in India, filing income tax returns is mandatory for people whose total income exceeds Rs. 2.5 lakh. But income from cryptocurrency trade is not detailed compared to most income categories in the Income Tax Act. Hence there is no direct guideline to file taxes for returns from cryptocurrencies.

How to File Taxes?

Yasaswy Sarma, a cryptocurrency enthusiast and Partner at chartered accountancy firm GPRSK and Associates in Chennai advised that,

“Documentation is the most important aspect of taxation and accounting. Regularly extract and save the transactions data from the trading platform you are dealing/trading with.”

Sarma says that taxation is mostly regarding proper declaration of transactions done by the trader even though it results in a profit or a loss. The documentation details required from clients include date of transaction, transaction ID, transaction type, quantity, prices, platform details etc.

Before starting to file your taxes, find out which category you belong to i.e.business category or as capital investor. Sarma says that there are generally two categories based on the trade method. He stated,

“In general, if you are trading in cryptocurrencies on a casual basis and mostly for investment purposes, your gains/losses will be considered as investments under the capital gains. Depending upon your trading cycle, if you are more of an active trader you will be considered under the business category.”

In case of traders who benefit from price variations in a day or short time frame, the profit or loss comes under business head income category. A balance sheet and P&L or income statement for the respective financial year has to be created by traders falling under this category. According to Sarma, tax payment on income from cryptocurrency trade can be paid as capital gains tax or business tax. The income slab of taxation you fall under determines the exact amount of tax to be paid. As most traders and investors have started trading this financial year they have not yet filed their income taxes. Many of them have not converted their cryptocurrency holdings into Indian rupees to gain profits.

Cryptocurrency a Capital Asset?

Shailendra Kumar, founder and CEO of TaxIndiaOnline, states that any type of gain to be considered as capital gain should be a capital asset but cryptocurrencies don’t fall under them. Kumar says,

“If you are going to declare something as capital gains, first of all it has to be a capital asset. Who has declared cryptocurrency as a capital asset? You are just presuming it.”

Kumar insisted that if someone wants to file taxes, cryptocurrency trade income should be treated as income from business provided cryptocurrencies have not been identified as a legitimate asset or capital asset in India. He stated, “If someone is trading in cryptocurrency and wants to declare it and pay taxes, the IT Act doesn’t stop you from doing that. In that scenario it (income from cryptocurrency trade) can be treated as profit from business. So, it’s a business income.”

FEMA and other Regulation

To transact in altcoins unavailable on Indian exchanges, cryptocurrencies bought in India are transferred by traders to exchanges abroad. Foreign Exchange Management Act (FEMA) rules apply in these cases which details laws for civilians dealing with foreign currency.

Traders who pay taxes for the money accounted for have nothing to worry about. But rules are laid for forex transactions or the Enforcement Directorate by central bank that strictly observes violations of FEMA or the Prevention of Money Laundering Act might require explanation for transactions.

Kumar explains,

“If someone wants to pay taxes, the Income Tax department will have no objection… they will welcome it. But, if the information is shared with other enforcement agencies, then the return filer may be liable to penal action.”

As there is no regulation regarding accepting cryptocurrency as reward for goods or any other services, or on how to file taxes for the gains from cryptocurrency, a precautionary measure can be taken by recording such transactions and their details. So the general question of “Do I need to file taxes for my Bitcoin returns?” would be answered with upcoming rules and regulations.

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