Taxability of Bitcoin: A deeper look

[webtricks]

Hey guys,
I know there are few threads discussing about the taxability of Bitcoins in India already however I would like to raise some different concerns. If you are Crypto Earner too, must read the whole post. I tried to be very informative by taking my own case as example:

Upto the PY 2017-18, Exchanges were operating in India. I used to sell my Bitcoins on Zebpay and Unocoin. I am not a trader, I haven't bought Bitcoins directly from my bank account ever except once in 2016 when I bought Ethereum worth few thousands in rupees. So I fill my Income Tax return as an income earner. I showed Bitcoin earnings as income and filed it as the professional receipts under Section 44ADA.

But that's not possible from PY 2018-19. Why? Because Exchanges no longer operate in India. Now my Bank Statement doesn't have a separate record of incoming-remittance as it used to be earlier when credits were marked from Zebpay or Unocoin. It was easy for me to categorize any credit as income because it was from Zebpay's bank account or Unocoin's Bank Account. But in past year I only used P2P. Now when we sell on P2P, the amount in bank is credited by some other buyer who is also Indian resident. Now in this new system, it is impossible to show Bitcoin earnings as income because buyer is not your employer, not a medium like Zebpay and not connected to your work at all.

In such a scenario I can only see following ways out:
1. I should file my income as Capital Gains where I can mark Cost of Acquisition to be NIL and file either STCG or LTCG on whole amount which has been credited to my account in previous year from buyers.
2. Carry on with my existing practice of showing credits as receipts and pay tax under PGBP. However, in this case I won't be able to provide any bill if I received Notice from Income Tax Department.

Are you facing the similar situation? If yes, then what have you decided. If no, then too share your views. Let's have a quality discussion as it is serious matter for Crypto Earners in India.

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[RapTarX]

I have sometimes sold BTC for INR face to face. In these days, I was not too much familiar with all the available ways of trading btc.
In case someone is doing face to face deal, I don't think there's any payable taxes since no bill is there.
In most cases, I didn't hold bitcoin for long term. Can I count it as Capital gain too, I'm not much expert on these stuff. Is there any limit which will not be counted as capital gain even if I have gained a little profit?

[webtricks]

In most cases, I didn't hold bitcoin for long term. Can I count it as Capital gain too, I'm not much expert on these stuff. Is there any limit which will not be counted as capital gain even if I have gained a little profit?

It will be counted as Capital Gains even if you sell an investment after 5 minutes of buying if you made the profits. That is why Capital Gains are categorized as two types: Short Term Capital Gains or STCG and Long Term  Capital Gains or LTCG. If you sell investment after holding it for more than 3 years then it is LTCG and if you sell it within 3 years of purchase then it is STCG. In case of securities like shares and stock, we consider 1 year holding period. If you sell security after 1 year of purchase then it is LTCG and vice-versa. However, in India Bitcoin is not considered as security so the rule of 3 years will apply. So if you bought BTC on and after 1st April, 2016, it will be STCG for you.

The taxable rate in case of STCG is as per Income Slab rate i.e.:
5% for 2,50,000 - 5,00,000 rupees
20% for 5,00,000 - 10,00,000 rupees
30% for amount bigger than 10,00,000

The taxable rate in case of LTCG is flat 20% no matter what amount. Plus you also get benefit of indexing, hence you can inflate the cost of purchase and show less CG.

Any other doubt? Feel free to ask.

[RapTarX]

In most cases, I didn't hold bitcoin for long term. Can I count it as Capital gain too, I'm not much expert on these stuff. Is there any limit which will not be counted as capital gain even if I have gained a little profit?

It will be counted as Capital Gains even if you sell an investment after 5 minutes of buying if you made the profits. That is why Capital Gains are categorized as two types: Short Term Capital Gains or STCG and Long Term  Capital Gains or LTCG. If you sell investment after holding it for more than 3 years then it is LTCG and if you sell it within 3 years of purchase then it is STCG. In case of securities like shares and stock, we consider 1 year holding period. If you sell security after 1 year of purchase then it is LTCG and vice-versa. However, in India Bitcoin is not considered as security so the rule of 3 years will apply. So if you bought BTC on and after 1st April, 2016, it will be STCG for you.

The taxable rate in case of STCG is as per Income Slab rate i.e.:
5% for 2,50,000 - 5,00,000 rupees
20% for 5,00,000 - 10,00,000 rupees
30% for amount bigger than 10,00,000

The taxable rate in case of LTCG is flat 20% no matter what amount. Plus you also get benefit of indexing, hence you can inflate the cost of purchase and show less CG.

Any other doubt? Feel free to ask.

So, any crypto earning is counted as STCG, It's very much clear now. I really appreciate your effort. Why not other members join the discussion? I think it is something we must know better.

[SaShiRaJaVu]

In such a scenario I can only see following ways out:
1. I should file my income as Capital Gains where I can mark Cost of Acquisition to be NIL and file either STCG or LTCG on whole amount which has been credited to my account in previous year from buyers.
2. Carry on with my existing practice of showing credits as receipts and pay tax under PGBP. However, in this case I won't be able to provide any bill if I received Notice from Income Tax Department.

Are you facing the similar situation? If yes, then what have you decided. If no, then too share your views. Let's have a quality discussion as it is serious matter for Crypto Earners in India.

Filing under capital gains is the option if you are making enough money with bitcoin, but the real problem is with the current government, you really cannot trust how they will deal with the platform since there is no clarity on whether they will legalize it or not, what if they go after everyone who traded bitcoin once you report it as capital gains and then there will be a huge issue to deal with the legal issues. I am not that good in this field and hence i posed this doubt. Will the government has the ability to come after bitcoin investors at a later time if they ban it completely.

[webtricks]

In such a scenario I can only see following ways out:
1. I should file my income as Capital Gains where I can mark Cost of Acquisition to be NIL and file either STCG or LTCG on whole amount which has been credited to my account in previous year from buyers.
2. Carry on with my existing practice of showing credits as receipts and pay tax under PGBP. However, in this case I won't be able to provide any bill if I received Notice from Income Tax Department.

Are you facing the similar situation? If yes, then what have you decided. If no, then too share your views. Let's have a quality discussion as it is serious matter for Crypto Earners in India.

Filing under capital gains is the option if you are making enough money with bitcoin, but the real problem is with the current government, you really cannot trust how they will deal with the platform since there is no clarity on whether they will legalize it or not, what if they go after everyone who traded bitcoin once you report it as capital gains and then there will be a huge issue to deal with the legal issues. I am not that good in this field and hence i posed this doubt. Will the government has the ability to come after bitcoin investors at a later time if they ban it completely.

I don't think government will come after old transactions even if trading Bitcoin gets ban in future. Any law is applicable from the point of time when it is actually comes into effect. All transactions before that point of time is outside the scope of that law. So there is no problem to report any Crypto profits as CG for filing return of Assessment Year 2019-20.
The actual problem which makes reporting income as Capital Gains difficult is complications in finding Cost of Acquisition. In the absence of COA, one has to pay tax on whole selling value which would result in lots of money flowing out as a tax.

[TigerMart]

Capital Gain applies only when you have a gain on your invested capital. If you have never bought crypto, there is no question of capital gain either. Make sure to accept the proceed of your crypto sales at a current account. Keep note of all the transactions. Pay tax as per presumptive taxation rules. Remember, if the total volume is over 20L INR, you need GST registration.

[SaShiRaJaVu]

I don't think government will come after old transactions even if trading Bitcoin gets ban in future. Any law is applicable from the point of time when it is actually comes into effect. All transactions before that point of time is outside the scope of that law. So there is no problem to report any Crypto profits as CG for filing return of Assessment Year 2019-20.
The actual problem which makes reporting income as Capital Gains difficult is complications in finding Cost of Acquisition. In the absence of COA, one has to pay tax on whole selling value which would result in lots of money flowing out as a tax.

As per law they cannot come after us, what if they come out with a verdict that they need to investigate those transaction for terrorist funding and other illegal activities and with a volatile government like this, we should anticipate extreme things, i am citing this simply because of the past experience we know, anyone expected something like demonetization in the past, i am sure no one in the wildest dream would think about that, your money is not having value and you have to stand in queue leaving everything to get your hard earned money from banks and to see their attitude while doing so, never heard before that you will kill people because of what they eat, we have seen all those in the past five years.

Capital Gain applies only when you have a gain on your invested capital. If you have never bought crypto, there is no question of capital gain either. Make sure to accept the proceed of your crypto sales at a current account. Keep note of all the transactions. Pay tax as per presumptive taxation rules. Remember, if the total volume is over 20L INR, you need GST registration.

I am really ignorant in these things, why would you need a GST registration if there is no regulations about it. I am not sure what is presumptive tax, the head ache of filing the tax is done by my CA, the transactions i got from bitcoin are in my personal account and usually split in my family members account to avoid taxation and i never filed them till now due to the grey situation we have.

[TigerMart]

Capital Gain applies only when you have a gain on your invested capital. If you have never bought crypto, there is no question of capital gain either. Make sure to accept the proceed of your crypto sales at a current account. Keep note of all the transactions. Pay tax as per presumptive taxation rules. Remember, if the total volume is over 20L INR, you need GST registration.

I am really ignorant in these things, why would you need a GST registration if there is no regulations about it. I am not sure what is presumptive tax, the head ache of filing the tax is done by my CA, the transactions i got from bitcoin are in my personal account and usually split in my family members account to avoid taxation and i never filed them till now due to the grey situation we have.

Follow this thread to understand GST requirement - https://bitcointalk.org/index.php?topic=5126753.0. Dont bother about GST if your turnover is below 20L INR.

[webtricks]

Capital Gain applies only when you have a gain on your invested capital. If you have never bought crypto, there is no question of capital gain either.

Yes, right. But the question is what could be the alternative now. I want a tension free filing of income with no trouble from Income Tax Dep. Therefore, I thought declaring my whole income as CG (although it isn't) could be an easy way out. Though I have to pay tax lot more than what it will be in presumptive taxation, but still Income Tax dep. won't investigate CG much.

Make sure to accept the proceed of your crypto sales at a current account. Keep note of all the transactions. Pay tax as per presumptive taxation rules.

I did file my return under 44ADA as presumptive taxation last year because it was possible to trail back the source of income via Zebpay account. I can easily differentiate my crypto receipts from other receipts because they were credited from Zebpay account. But this year, receipts have come from personal accounts of buyers because I sold on P2P exchanges. Hence, it is almost impossible to differentiate which are actually crypto receipts and which are not. In such circumstances, I have no evidence to trail back transaction to my crypto earnings. Income Tax Department will surely not believe my return on mere words.

Remember, if the total volume is over 20L INR, you need GST registration.

Only if Business Receipts/Turnover is above 20L, right? GST and Income Tax are two separate domains. Last year my total income did exceed 20L but I smartly distributed it among 5 heads of income and income under 44ADA was lower than 20L. I showed excess as Capital Gains and Other Incomes. Hence I was free from the burden of GST.

[Virtual miner]

You have pretty well highlighted the issue, but I think the concerns have not at all changed even after the ban of exchanges in India despite of one thing that you just have to scrutinize your banks statements to find out which receipts are from bitcoin selling.

Let me explain, If you have filed the return last year in 44ADA with showcasing your receipts being professional in nature without an issue of invoice the same can still be done. Moreover the fact the GST registration limit too has been raised to 40 lakhs gives you a large enough window for not issuing an Invoice. Most of the freelancers hardly issue any kind of invoices to their clients. Moreover as bitcoin has no legal statue as to what it is whether a commodity, currency or medium of exchange we can use it as anything. So you still have two options available.

1. Show it as a business income and professional receipts if you are earning bitcoin from signature campaigns or some work. Don't forget to claim for som expenses as a reduction.

2. If the receipts are larger than 40 Lakhs then it's better to take up a GST number. issuing invoice is never a problem and with an income of around 40 Lakhs an accounting software won't hurt that much.

I have sometimes sold BTC for INR face to face. In these days, I was not too much familiar with all the available ways of trading btc.
In case someone is doing face to face deal, I don't think there's any payable taxes since no bill is there.
In most cases, I didn't hold bitcoin for long term. Can I count it as Capital gain too, I'm not much expert on these stuff. Is there any limit which will not be counted as capital gain even if I have gained a little profit?

As per law a capital asset is a property of any kind whether for business or not. So you can regard bitcoin as your property thus a capital asset. If you have made a little profit better show its Sale Amount - Purchase Consideration = Profit . Pay Tax at this profit in form of Short term Capital Gain to stay on the safer side. Webtricks very well highlighted the slabs for it
 

Make sure to accept the proceed of your crypto sales at a current account. Keep note of all the transactions. Pay tax as per presumptive taxation rules.

I did file my return under 44ADA as presumptive taxation last year because it was possible to trail back the source of income via Zebpay account. I can easily differentiate my crypto receipts from other receipts because they were credited from Zebpay account. But this year, receipts have come from personal accounts of buyers because I sold on P2P exchanges. Hence, it is almost impossible to differentiate which are actually crypto receipts and which are not. In such circumstances, I have no evidence to trail back transaction to my crypto earnings. Income Tax Department will surely not believe my return on mere words.

Tracing back transactions is not that difficult trust me. You just need to get your annualized bank statement which does mentions the name of the sender that will make it much easier for you to trace whether it's an income or merely a casual receipt. Even if you are unable to do so using this method try to get a statement from the P2P methods that you have used as far as I know wazirx, bitbns, koinex loop, remitano all provide with such statements. Even if you are unable to trace out transaction due to huge volume of transactions including the personal ones(which I don't think might happen with a saving account). Better just make a rough estimate of how much earnings you might have received from Crypto such as a percentage of total receipts. Every statement has total Receipts columns just apply a roughly calculated percentage make sure to be on the upper side to be safe. This would be the best solution with zero problems.

Moreover, If you have high volume of transactions, I would recommend you make a separate saving/ current account for your crypto related receipts from this year making it way easier to trace out such transactions just like normal businesses do. You will save yourself a lot of headache.

[webtricks]

~~

Thank you so much. Your post was quite helpful.

I would also like to point out one thing. GST limit has been raised to 40 lakhs for Goods only. For services (in which we Crypto Earners will fall), it is still 20 lakhs.

[newIndia]

Remember, if the total volume is over 20L INR, you need GST registration.

Only if Business Receipts/Turnover is above 20L, right? GST and Income Tax are two separate domains. Last year my total income did exceed 20L but I smartly distributed it among 5 heads of income and income under 44ADA was lower than 20L. I showed excess as Capital Gains and Other Incomes. Hence I was free from the burden of GST.

What do you mean by distributed it among 5 heads of income? Do you mean you showed it under 5 different PAN?

[webtricks]

Remember, if the total volume is over 20L INR, you need GST registration.

Only if Business Receipts/Turnover is above 20L, right? GST and Income Tax are two separate domains. Last year my total income did exceed 20L but I smartly distributed it among 5 heads of income and income under 44ADA was lower than 20L. I showed excess as Capital Gains and Other Incomes. Hence I was free from the burden of GST.

What do you mean by distributed it among 5 heads of income? Do you mean you showed it under 5 different PAN?

There are five heads of income while filing income tax returns:

• Salary Income
• Income from House Property
• Profit from Business and Income
• Capital Gains
• Other Incomes

Only third income i.e. PGBP is subject to GST charge. So if you earning in any other head then your income isn't subject to GST. You have to pay Income Tax only. So what I did, I make sure my receipts in third head are below 20L so the question of GST doesn't arise.
Else I filed income return from single PAN only, not 5 lol.

[newIndia]

Remember, if the total volume is over 20L INR, you need GST registration.

Only if Business Receipts/Turnover is above 20L, right? GST and Income Tax are two separate domains. Last year my total income did exceed 20L but I smartly distributed it among 5 heads of income and income under 44ADA was lower than 20L. I showed excess as Capital Gains and Other Incomes. Hence I was free from the burden of GST.

What do you mean by distributed it among 5 heads of income? Do you mean you showed it under 5 different PAN?

There are five heads of income while filing income tax returns:

• Salary Income
• Income from House Property
• Profit from Business and Income
• Capital Gains
• Other Incomes

Only third income i.e. PGBP is subject to GST charge. So if you earning in any other head then your income isn't subject to GST. You have to pay Income Tax only. So what I did, I make sure my receipts in third head are below 20L so the question of GST doesn't arise.
Else I filed income return from single PAN only, not 5 lol.

If your total income from crypto sale was 20L+, then how did you show them under Salary Income and Income from House Property? Salary Income requires quotation of your employer's pan and Income from House Property must require some kinda document to identify the property. Is not it?

I understand the Profit from Business and Income, Capital Gains and Other Incomes parts though...

[webtricks]

~

If your total income from crypto sale was 20L+, then how did you show them under Salary Income and Income from House Property? Salary Income requires quotation of your employer's pan and Income from House Property must require some kinda document to identify the property. Is not it?

I understand the Profit from Business and Income, Capital Gains and Other Incomes parts though...

I didn't say that I showed my Crypto Earnings as Salary or House Income. I cleared it in my previous post:

Only if Business Receipts/Turnover is above 20L, right? GST and Income Tax are two separate domains. Last year my total income did exceed 20L but I smartly distributed it among 5 heads of income and income under 44ADA was lower than 20L. I showed excess as Capital Gains and Other Incomes. Hence I was free from the burden of GST.

I distributed my income in three of the heads i.e. Business Income, Capital Gains and Other Sources. There is no requirement except proof of purchase and sales for Capital Gains declaration and that I showed. For Other Sources, you don't need to show any proof at all.

[webtricks]

In which  category  it  falls if crypto acquired through selling  virtual goods / virtual games? Does it needs official registration while offering virtual goods / virtual games for crypto?

I would suggest to show such income as Business Income. You can pay presumptive tax under Section 44AD. If you show income under 44AD, there is no need to maintain any books or show any invoicing. You just need to pay 6%/8% tax on your Gross Receipts. Gross Receipt is the total money you received in your bank account from the sales.
As a sole proprietor seller, you need no kind of official registration to sell virtual goods/games if your sale in under 40 Lakh rupees. In case you are earning above that, you are liable to register under GST Act. No other law applies on you.

[TigerMart]

In which  category  it  falls if crypto acquired through selling  virtual goods / virtual games? Does it needs official registration while offering virtual goods / virtual games for crypto?

I would suggest to show such income as Business Income. You can pay presumptive tax under Section 44AD. If you show income under 44AD, there is no need to maintain any books or show any invoicing. You just need to pay 6%/8% tax on your Gross Receipts. Gross Receipt is the total money you received in your bank account from the sales.
As a sole proprietor seller, you need no kind of official registration to sell virtual goods/games if your sale in under 40 Lakh rupees. In case you are earning above that, you are liable to register under GST Act. No other law applies on you.

So, if someone crypto sale can be considered as proceeds of goods sale as well as service? GST limit is 40L for one and 20L for another. Does this consideration require further documentation?

[webtricks]

In which  category  it  falls if crypto acquired through selling  virtual goods / virtual games? Does it needs official registration while offering virtual goods / virtual games for crypto?

I would suggest to show such income as Business Income. You can pay presumptive tax under Section 44AD. If you show income under 44AD, there is no need to maintain any books or show any invoicing. You just need to pay 6%/8% tax on your Gross Receipts. Gross Receipt is the total money you received in your bank account from the sales.
As a sole proprietor seller, you need no kind of official registration to sell virtual goods/games if your sale in under 40 Lakh rupees. In case you are earning above that, you are liable to register under GST Act. No other law applies on you.

So, if someone crypto sale can be considered as proceeds of goods sale as well as service? GST limit is 40L for one and 20L for another. Does this consideration require further documentation?

Since sale in crypto is little onerous to track and trails cannot easily identified, I think it is possible to show 'sale of service' as 'sale of goods'. But I wouldn't suggest doing it because Income Tax Department generally ignore service providers when compared to goods providers so it would be better to escape unnecessary inquiry if sale is shown as 'sale of service'. Generally no documentation is required for small merchants like us. The limit of 44AD is Rs. 2 crores. If you fall below it, you aren't required to maintain any kind of documentation. 
One more thing, even if you exceeds GST limit of 20/40 lakh as the case maybe, you can still ignore the complications of GST by opting Composition Scheme. The limit of Composition Scheme has been exceeded to Rs. 1.5 crore. So if your earning is between 20/40 lakh and 1.5 crore, you can opt for Composition Scheme and there will be no requirement to issue GST invoices. Just pay GST at fixed percentage on your total turnover.

[TigerMart]

In which  category  it  falls if crypto acquired through selling  virtual goods / virtual games? Does it needs official registration while offering virtual goods / virtual games for crypto?

I would suggest to show such income as Business Income. You can pay presumptive tax under Section 44AD. If you show income under 44AD, there is no need to maintain any books or show any invoicing. You just need to pay 6%/8% tax on your Gross Receipts. Gross Receipt is the total money you received in your bank account from the sales.
As a sole proprietor seller, you need no kind of official registration to sell virtual goods/games if your sale in under 40 Lakh rupees. In case you are earning above that, you are liable to register under GST Act. No other law applies on you.

So, if someone crypto sale can be considered as proceeds of goods sale as well as service? GST limit is 40L for one and 20L for another. Does this consideration require further documentation?

Since sale in crypto is little onerous to track and trails cannot easily identified, I think it is possible to show 'sale of service' as 'sale of goods'. But I wouldn't suggest doing it because Income Tax Department generally ignore service providers when compared to goods providers so it would be better to escape unnecessary inquiry if sale is shown as 'sale of service'. Generally no documentation is required for small merchants like us. The limit of 44AD is Rs. 2 crores. If you fall below it, you aren't required to maintain any kind of documentation. 
One more thing, even if you exceeds GST limit of 20/40 lakh as the case maybe, you can still ignore the complications of GST by opting Composition Scheme. The limit of Composition Scheme has been exceeded to Rs. 1.5 crore. So if your earning is between 20/40 lakh and 1.5 crore, you can opt for Composition Scheme and there will be no requirement to issue GST invoices. Just pay GST at fixed percentage on your total turnover.

I did a little research on this. As it seems, sale of virtual goods/games can't be considered as sale of goods. In fact, Crypto sale will always come under OIDAR services. Hence, GST registration limit will be 20L instead of 40L.
Moreover, Composition Scheme, as described here, appears to be pretty complicated.