With the prices of cryptocurrencies that have increased in recent years, many Indians have exploited the instant wealth. But paying taxes on this income has turned into a nightmare.
This is because, according to Indian tax laws, the nature of virtual currency investments is not clear. What is certain is that there are no taxes that escape.
In December 2017, the Department of Income Tax (I-T) examined various exchanges of cryptocurrencies in the country to understand their modus operandi and user base. Since then, reportedly, communications to approximately 500,000 investors have been notified for non-payment of taxes. In recent months, the stock markets have also appeared on the Reserve Bank of India and on the government's radar.
The RBI has banned banks from dealing with these exchanges and investors in any way, while a panel formed by The Government of Narendra Modi is working on draft regulations for digital currencies. In these volatile times, the exchanges themselves have urged customers not to skip taxes.
While the revised deadline for the presentation of IT returns approaches, here is a look at what investors could do.
How the tax treatment of cryptocurrency continues to be in the gray zone, is open to interpretation, advises the auditors (CA).
"In case of gains, you must declare profits or capital gains from you made by the transaction in criptovalute year -wise with statements showing the operation," read the tax notice sent by the IT department to investors in recent months. As a result, most of the chartered ACs are inclined to treat these investments as capital gains tax.
The premise of capital gains is that an investment will be held for a certain period of time so that its value is appreciated. These taxes are divided into in the short and long term.
"For most investments such as stocks, jewelery, land, debt funds, etc. The period of time that an item can be taxed under short or long-term gains is specified," said Archit Gupta, CEO of ClearTax online clear-code company. "However, since it is not specified, we will hire and use the longest three-year period, and only after holding the investment for three years will it be called long-term gains."
In the case of a short-term gain, the amount is added to income and taxed based on the tax plate that an individual falls under. For example, anyone who earns over Rs10 lakh ($ 14.614) will be taxed at 30%.
If it falls into the long-term category, it will be taxed at 20%. The tax rate may fall further when the indexation benefit is applied, which allows inflation to be adjusted during the period in which these investments were held. Each year, the Central Board of Direct Taxes free the cost inflation on which these assessments are made.
However, since the details of tax treatment are not clear, Gupta suggests a safer alternative is to report it as income from other sources. In this case, the amount is added to the salary or business income and then the taxes are paid on it as per the slab in which an individual falls.
For a trader, earnings from virtual currencies are treated as earned income.
"Under this, some expenses related to the business, maintenance of the office, such as the purchase of a computer, internet expenses, office rent, administrative costs, etc., can be deducted", explained a another financial planner, asking for anonymity. "So, on the remaining amount, the taxes will be applicable as per the plate."
If you are a trader and your turnover exceeds Rs2 crore score, you must do a tax audit from a registered accountant.  Another key problem is choosing the right form for returning files. "Depending on whether an individual treats it as capital gains or income from other sources or assets, it is necessary to select ITR2 or ITR3," explained Gupta.