Cryptocurrency

India is neither a hero nor a villain when it comes to regulating cryptocurrency transactions. Yes, Indians are eagerly investing in cryptocurrencies with the hope that they could experience a price spike. On the other hand, the Indian government, which was initially planning to shun the door for cryptocurrencies, is now leaving it ajar. At a time when things are critical and unsettling, let’s have a look at the recent developments in income tax rules on cryptocurrencies in India.

Cryptocurrency is digital money that functions in decentralized mode. Cryptocurrencies use cryptography to secure their transactions. Many nations across the globe have issues with its unregulated movement. Owing to their independent state, cryptocurrencies don’t come under any government regulation. For a very long time, the income tax department didn’t notice the threat that cryptocurrency in India possessed. But finally, they are realizing that leaving digital currency transactions and exchanges unregulated could set a backdoor for illegal and unauthorized activities. Although the Indian government thought of completely banning the cryptocurrency movement and even took simple initiatives, they concluded that blocking digital currencies wouldn’t be the best option. However, taxing cryptocurrencies cannot be ruled out because the Indian income tax laws always sought to tax income received irrespective of the form in which it is received. In 2018, the Reserve Bank of India (RBI) banned the use of cryptocurrency as a legal tender in India, which was overturned by the Indian Supreme Court in 2020, allowing banks to handle cryptocurrency transactions from traders and exchanges. 

In 2021 alone, over 10 million Indians invested in cryptocurrency. As per a report, India's investments in the cryptocurrency have surged to US$6.6 billion in 2021, accelerated by young investors in particular. The upsurge in adoption and the input of money has raised concern among government officials. While they cannot rule out the possibility of taxing cryptocurrencies, it is very difficult to come up with a framework that could regulate every form of digital currency transaction. Currently, it is neither authorized nor is regulated by any central authority in India. But according to the finance ministry and the special committee set up to decide on the government’s stance, income tax rules on cryptocurrency could be intensified.

Liability of Income Tax Rules in India

Even though no government authority body or the Reserve Bank of India has recognized cryptocurrencies as a legal tender, speculations suggest that under the Income Tax Act 1961 and the Central Goods and Services Tax (GST) Act, 2017, cryptocurrencies could be regulated. 

The tax liability will depend on whether the particular cryptocurrencies was held in the form of a currency or an asset. Under Section 2(13) of the Income Tax Act, the definition of business is inclusive, consisting of ‘trade, commerce, or manufacturing or any adventure or concern of such nature.’ Therefore, cryptocurrencies can be added under this definition and can be brought inside the law. 

Unfortunately, plainly adding cryptocurrency and bringing it under scrutiny will not help in tax returns. The digital currency sphere is void and has a variety of methods in creation and execution. For example, cryptocurrency mining, transactions, and sending it as gifts are some sources of diversity in the cryptocurrency market. But generally, the duration of cryptocurrency holding is what will come under tax calculation. If a cryptocurrency is held for more than three years, it will be taxed as long-term capital gains and if it is less than three years, then it will come under short-term capital gains.