Income Tax dept. targets cryptocurrency investments; taxation on par with LTCG

Since the Union Budget on February 1, 2018, cryptocurrency has been in the spotlight and the government is beginning to realize the immense tax potential that lies in it.

Earlier this week, the Income Tax department issued notices to around one lakh people who invested in cryptocurrencies.

CIO India talks to Ajeet Khurana, head of the Blockchain and Cryptocurrency Committee of India (BACC) and tax expert Ganesh Prasad, to get an understanding of cryptocurrency taxation, and how difficult is it for the government to track down undisclosed earnings.

So how hard is it for the govt. to track bitcoin investments?

Prasad says that most bitcoin providers today are following stringent KYC norms and investment into bitcoins usually happens through normal banking channels. “That said, there could be a few rogue cases, like with every other currency that may be done under the radar, making it difficult for the government to track. Transactions can be difficult to track, but it’s not impossible,” he explains.

Khurana opines that there is one foolproof method for the government to track these transactions: If they encourage people to trade on exchanges, all the provisions and regulations applicable to the financial sector, for instance, KYC and anti-money laundering, will be implied on cryptocurrency transactions.

“If the transactions go through us, then tracking them can become extremely easy. As Aadhaar and PAN card details are available with exchanges such as ours, the government can seek information around people’s investments, and we’ll provide it to them,” explains Khurana.

“We have information about every micro-transaction made through the exchange, and we’ve expressed our willingness to share this information with regulatory authorities, and we did share the information when they asked us in December,” reveals Khurana.

Income tax laws addressing cryptocurrency investments

Currently, the only ambiguous part is the government’s plans to classify cryptocurrency for income tax returns.

“If we go by generally accepted accounting principles, cryptocurrency will probably be taxed on par with capital gains – either long-term or short-term gains. However, if someone trades very frequently, they could be termed as business gains or business loss,” says Khurana.

Long-term capital gains are usually taxed at 20 percent. Therefore, the IT notices sent out asked for an advanced tax payment of 20 percent.

Until there’s more clarity on cryptocurrency being treated as a long term or short term capital gain, it will be treated as any other asset to be taxed.