Income tax returns (ITR) filing: Bitcoin, Ethereum, Ripple prices soaring; have you invested? Here is a warning on cryptocurrencies

Income tax returns (ITR) filing: Virtual currencies or cryptocurrencies such as Bitcoin, Ethereum, Ripple and Dash prices in India have been soaring and this has lured investors in droves. They are trying to get rich quick and have not understood the complications that can arise. No doubt, these cryptocurrencies have have hogged headlines in the financial market in recent times despite all warnings. According to a report, Bitcoin has given a return of 892 percent over the past one year. But why is something that no one knows where it originated in so much demand? The interest probably lies in the fact that the identity of people transacting through Bitcoin is never revealed as only their wallet IDs are logged in. So the purchases of the investors do not get tracked and yet they are able to make overwhelming returns. However, a platform like this, which has no regulation or no footprint, can become volatile and affect other market forces around it. As a result many countries all over the world including India do not yet recognise Bitcoin or other virtual currencies as legal tenders. Some countries like US, Canada and Australia have supported the use of Bitcoin. Regardless of its legal status, people still continue to invest in them as returns on them are very high compared to other financial instruments.

So what should you as an Indian investor do if you have already invested in it, but not sure how to show its tax outgo. Here are some major points to know about virtual currencies and their status in India. 

Virtual Currencies in India

There has been a lot of speculation on crypto currencies in the Indian financial market. Finance Minister Arun Jaitley in his February 1 Budget speechthis year said that crypto currencies aren’t legal tender. He reiterated a point that the country’s central bank RBI has also harped on several times.

However, there is still no clarity from the finance ministry whether crypto-currencies are taxable when trading on international exchanges. They have not even come up with any concrete statement on how to treat gains or losses from virtual currencies. Hence, there is a lot of speculation going around regarding treatment of crypto currencies for income tax returns.

How Gains or Losses From Virtual Currencies Be Treated?

These virtual currencies’ taxation will depend on how you treat income from them.

As Business Income: If the gains from Bitcoins are arising due to trading, it will be treated as business income. Suppose you buy and sell bitcoins regularly, then the gains from the sale of bitcoins will be business income and the loss would be business loss. One can set the gains or losses from it against other speculative businesses to ascertain tax liabilities. 

Income from other sources: In case the gains arise due to increase in prices while you hold it as an investment, the gains will be treated as income from other sources. But this residual income cannot be clubbed with income from salary, profession, house property, and should be included in ‘Income from other sources’.

Treat It As Capital Assets: Bitcoins are to be treated as capital assets if you buy for investment purposes and if you hold them for a longer duration and then sell it, the profit will attract capital gains tax as any other capital asset. So if you hold Bitcoins for not more than 36 months, the gains arising from it will be considered short-term capital assets. In case of short-term capital gains, the gains from sale of Bitcoins would be taxable at your applicable slab rates plus surcharge and education cess.

But if the holding period exceeds 36-months then long-term capital gain will be applicable—and a tax of 20% plus applicable surcharge and education cess, with the benefit of indexation will be applicable. 

How Safe Is It To Still Trade In Virtual Currencies?

At the moment, investors are inclined towards investing in Bitcoin as it not only keeps the identity anonymous but also gives high returns. But in India as there is no defined code on whether this form of currency is legal or not, it becomes a risky proposition. Some experts are also of the view that some crypto currency exchanges may see a potential danger of a shutdown although there is no immediate risk for investors. It is therefore wise to declare any gains or losses from sale of Bitcoins in your income tax returns. You have to ensure that you stay safe in all ways despite the heady returns Bitcoin, Ethereum, Ripple prices are providing.

(By Adhil Shetty, CEO, BankBazaar)