How to show earnings from cryptocurrencies in your ITR

Income Tax Return or ITR filing is compulsory for individuals earning a specified amount of income in a year. However, there is confusion among taxpayers on how the earnings from investments in cryptocurrencies such as Bitcoins should be disclosed in the ITR.

As per the income tax rule, gains derived from the sale of cryptocurrencies can be classified as either capital gains or business income.

According to Sujit Bangar, founder of TaxBuddy and Finbingo, the reporting of cryptocurrency transactions for income tax is required at two instances.

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"Firstly, if the taxpayers are holding cryptocurrency and their taxable income is exceeding Rs 50 lakh, they will have to report cryptocurrency as an asset in ITR. Secondly, when they sell the cryptocurrency, the gains or losses are to be reported as ‘income from capital gains’. If they held the asset for lesser than 36 months, then the gains/loss will be short term and in case it is held for more than 36 months, then the gains/losses shall be long-term," Bangar explains.

Rajasekhar Reddy Pallala, Chartered Accountant, IndiaFilings elaborates this further.

"Holders of bitcoins are of two types -- miners and investors. Miners earn bitcoins by mining the blocks created from the bitcoin transactions. On the sale of mined bitcoins, the cost of acquisition is nil, and Section 55 is also silent about the cost of acquisition of bitcoins. So, capital gains will not arise on the sale of mined bitcoins," Pallala explains.

In the case of investors, Pallala says that taxpayers can determine the cost of acquisition and sale value on the sale of purchased bitcoins. So the gain/(loss) on the sale of bitcoins are taxed as short/long term capital gains (loss).

Taxpayers should further note that for individuals who have capital gains or business income arising out of cryptocurrencies, ITR-2 and ITR-3 are the relevant forms for tax returns.