How to pay tax on bitcoins profit?

Here are various possibility of taxing bitcoin profits under different circumstances.

Rishabh Parakh

Dhiraj recently sold a Bitcoin worth Rs 2,75,000/- after the money what he invested in it got doubled. But he is not aware whether he need to pay tax on this or not and if tax needs to be paid then under what income tax head and how much! Let’s understand: -

Is profit on bitcoin selling tax free?

Like Dhiraj, there are many who have been making profit on the sale of bitcoins but there is no clarity in terms of how the profit should be taxed because the Indian Tax Laws does not cover the virtual currencies as yet.  But, investor beware, because our tax laws have provisions to bring any sort of income under its ambit via its five different heads irrespective of the form it has been received. The various heads are, income from house property, salary, capital gain or business and profession and the fifth one i.e. income from other sources is one such head which covers all your remaining income source which cannot be taken under any of the other four as mentioned above.

Under what head the profit of bitcoin will be taxed?

Since the income tax laws has not defined the asset class under which bitcoins or other crypto currencies will fall under hence there is a debate in terms of how the profits would be taxed.  So, we need to look at the reason from the investor’s perspective behind buying the said currency. Let us look at the various possibility of taxing bitcoin profits under different circumstances: -

Bitcoins purchased as an investment

Most of the people are investing in Bitcoins for making the gains on account of increase in the value of these coins thereby wanting to capitalize the price appreciation. In this particular scenario, it acquires the definition of a capital asset under Section 2(14) of the Income Tax Act and the resultant capital gains will be classified either as short-term or a long-term. Now whether the gains are short term or long term depends on the period these coins were held.

So, in case a person who has sold the bitcoins after holding it for more than three years needs to pay the long-term capital gain tax. The applicable tax rate is 20% for the long-term gains and the benefit of indexation will be allowed as per the income tax act. And anything sold in less than three years will be termed as a short-term capital gain and will be taxed according to your applicable tax slabs, if your income is more than 10 lakhs then gains will be taxable at the maximum rate i.e. 30% plus cess and surcharge as applicable.

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