This move could significantly increase the tax burden on crypto investors.
The government is looking to refine the definition of income and earnings specifically for crypto assets in the upcoming budget.
This would mean that the income tax on returns for investors or traders could reach 35% to 42% in the future.
The government has contacted senior tax advisers regarding the changes that will only impact crypto assets and no other asset class such as stocks.
“If the definition of income is changed in the tax framework, it could give the tax department leeway to levy an income tax on earnings generated from investing and trading in cryptocurrencies. Some clarity regarding taxation is required regarding cryptocurrencies, even though we don’t have a framework in place defining the asset class, ”said Dinesh Kanabar, CEO of Dhruva Advisors, a consultancy firm. tax.
The government is also seeking to explain how returns are calculated for crypto investors.
That is, Indians who have seen their cryptocurrencies appreciate during the year and exchanged them for other crypto assets without converting them back to fiat or INR will also be taxed.
“Even if the payment for an asset, say a painting or other crypto asset, is made in cryptocurrency, it is still income in the hands of the recipient. As the cryptocurrency has value underlying in Indian rupee, it should be taxed as income, ”said Sudhir Kapadia, national tax officer, EY India.
Investors would be forced to calculate the actual returns on their crypto assets, every time they sell them, and pay taxes on that.
They can continue to buy another crypto asset from that money – or a crypto currency afterwards, a person familiar with the development said.
Apart from this, the government could also introduce the Goods and Services Tax (GST).
The government could apply 18% GST on crypto trading, and the amount could be borne by an individual who buys it if the exchanges decide to pass it on to them.
“The government is considering a tax proposal that will allow it to tax all crypto holdings. So the GST will be levied at 18%, for individual holders it will be taxed at the highest bracket. If companies generate income, they can show crypto investments in the other income bracket, ”said one person familiar with the developments.
The government is considering defining cryptocurrencies as a commodity in the new bill which also proposes to compartmentalize virtual currencies based on their use cases.
“There is no preparation for the bill; the government is waiting for US policies to take shape, which are expected within the next 2-3 months. After the United States publishes its crypto policies, India should decide the way forward, “said one of the people familiar with the development.
Currently, there is no clarity on direct or indirect taxes when it comes to cryptocurrencies. This is primarily because it is not defined as a currency, asset, commodity, or service.