What is Cryptocurrency?
In simple words, cryptocurrencies are digital money that can’t be seen or touched but have certain value attached to them. They are support by blockchain technology which relies on a network of computers to keep track of transactions rather than on a centralized authority like a bank. Cryptocurrency is decentralized digital money, based on blockchain technology. You may be familiar with the most popular versions, Bitcoin, Ethereum, Ripple, Dogecoin etc but there are more than 5,000 different cryptocurrencies in circulation. Bitcoin was the first Cryptocurrency made.
There is no law which bans Cryptocurrency in India. Cryptocurrencies are not legal tender in India. While exchanges are legal in India due to the absence of a robust regulatory framework, a protracted licensing process makes it very difficult for certain Cryptocurrency services and innovative technologies to operate. Although there is currently a lack of clarity over the tax status of cryptocurrencies, the chairman of the Central Board of Direct Taxation has said that anyone making profits from Bitcoin will have to pay tax on them. Other Income Tax Department sources have suggested that Cryptocurrency profits should be taxed as CAPITAL GAINS. In March 2018 Reserve Bank of India which is the RBI issued a circular to all the Bank and Financial Institutions of the country asking them not to provide services or deal with anybody whose inter dealing in virtual Currencies or Crypto assets basically. This Circular of RBI was challenged upto the Supreme Court and the Supreme Court on March 2020 came out with its verdict; The Supreme Court said that circular was not legal because it violated the fundamental rights guaranteed by the constitution of India. Therefore currently there is no Legal Rule & Regulation for Cryptocurrency in India.
Crypto market is like stock market, just that you trade in digital currencies instead of stocks. The major difference is that Cryptocurrency markets are decentralized, which means they are not issued or backed by a central authority such as a government. The entire market runs on a network of computers.
Cryptocurrencies can be bought using various exchange platforms. The investors can download the apps from Google Play Store or App Store. They just need to sign up using their credentials, complete the KYC process, transfer money to the wallet and make the purchase. The popular Indian platforms include WazirX, Zebpay, Coinswitch Kuber and CoinDCX GO. The investors can also buy Bitcoin, Dogecoin, Ethereum and other cryptocurrencies through international trading platforms like Coinbase and Binance. Some small amount of charges is applicable with every transaction you make same like as Share Brokerage charges.
Charges may vary with different platforms.
The Cryptocurrency tax shows the capital gains tax on Cryptocurrency depending on the holding period. You must Know the purchase price and the sale price of the Cryptocurrency along with the holding period. Same as like you need data for calculating other Capital Gain Tax.
For example, you have bought some Cryptocurrency units in April 2018 for Rs 80,000 and sold them for Rs 1,20,000 in December 2019. The holding period is less than 36 months. The gains are short-term capital gains of Rs 1,20,000 – Rs 80,000 = Rs 40,000. It is added to your taxable salary and you are taxed as per your income tax bracket.
Suppose you had purchased some Cryptocurrency units in June 2016 for Rs 80,000 and sold them in October 2018 for Rs 3,00,000. The holding period is above 36 months. The gains are called long-term capital gains and are taxed at 20% with indexation benefit.
The long-term capital gains are:
Original cost of acquisition = Rs 80,000
CII (Cost of Inflation Index) in the year of purchase = Rs 254
CII (Cost of Inflation Index) in the year of sale = Rs 280
You have the indexed cost of acquisition = CII in the year of sale* (purchase price of the asset) / CII in the year of purchase.
|Financial Year||Cost Inflation Index (Rs)|
Indexed cost of acquisition = 280 * (80,000) / 254 = Rs 88,189.
The sale price of the asset = Rs 3,00,000
Long-term capital gains = The sale price of the asset – The indexed cost of acquisition.
Long-term capital gains = Rs 3,00,000 – Rs 88,189 = Rs 2,11,811.
You have long-term capital gains at 20% = Rs 2,11,811 *0.2 = Rs 42,362.