How to pay tax on bitcoin gains:
If you hold bitcoins for more than 36 months, long term capital gains (LTCG) tax will be applicable. ITR2 or ITR3 are to be used for filing bitcoin tax.
2017 was bullish for bitcoins, one of the most popular cryptocurrencies in the world. For the first time, the cryptocurrency was close to touching $20,000, or ₹ 13.4 lakh, for a bitcoin. Suddenly, from a tea seller to wealth managers, everybody was looking to explore the space. Since December 2017, bitcoin prices have tumbled. Currently, it hovers around $6,000. However, some bitcoin holders managed to get good returns. If you are wondering how to calculate the tax on it and the process to file it, here is what you should know:
Investment or trading
The bitcoin tax differs based on your holding. “The first step is to see whether you were trading in it or holding it as an investment. If it is an investment, then you will have to pay capital gains tax. If you are trading in bitcoins, it is a business income. So if your turnover exceeds ₹ 2 crore, you are liable for tax audit,” said Gautam Nayak, a Mumbai-based chartered accountant. The income tax department has not specified the classification for trading and investment.
“You have to consider multiple factors such as duration, frequency of the transaction, time spent on it and the intention of the transaction. All this will determine whether it is an investment or business income,” said Nayak.
If you are an investor, you have to pay capital gains tax. “Capital gains can be either short-term or long-term. There is no provision for bitcoins and other cryptocurrencies in the Income Tax Act. In the absence of any provision, we assume the general provision will apply. Hence, if you hold bitcoins for less than 36 months, short-term capital gains will be applicable. If you hold bitcoins for more than 36 months, long-term capital gains tax (LTCG) will be applicable,” said Naveen Wadhwa, deputy general manager, Taxmann.com, a tax services provider.
Short-term capital gains will be clubbed with your salary income and taxed at slab rate. In case of LTCG tax, you will have to pay 20% tax, with the benefit of indexation.
Filing tax returns
By now, you would have got your Form 16 from your employer. Now is the time to file your income tax returns(ITR). If you have gains from selling bitcoins, you will have to pick the right ITR form first. “ITR1 is not for you. Depending on whether it is considered capital gains or business income, you will have to opt for ITR2 or ITR3,” said Wadhwa. Experts suggest taking professional help to file returns if you have made gains from bitcoins. “Individuals may find it difficult to calculate capital gains. Hence, you may need help from tax experts,” said Wadhwa.