RBI bans Bitcoin and other virtual currencies, investors concerned for tax dues
MUMBAI: A day after the Reserve Bank of India (RBI) barred banks from dealing in cryptocurrencies, investors rushed to square off positions and sought advice on how much tax they should pay on returns made in FY18 and if they can do so before the July-end deadline.
The worry is that they may be left holding the virtual currency if they don’t sell it now and transfer the money into their bank accounts. They also fear a crackdown by tax authorities and other government agencies, experts said.
Bitcoin exchanges such as Zebpay and CoinSecure saw a spike in transaction volumes of about 40%, with about 90% of that being on the sell side, sources said.
Respondong to an email query, a spokesperson for CoinSecure said, “Yes, there has been some amount of panic selling. We’ve seen a 4x increase in our volumes since yesterday.”
Investors aren’t sure about the quantum of tax they should pay.
Some tax experts said returns from cryptocurrencies such as Bitcoin could attract 20-30% tax, depending on whether they are categorised as business income or capital gains.
Some advisers are telling clients to pay the maximum 30%, hoping that this may protect them from the attentions of government agencies such as the Enforcement Directorate, insiders said.
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“The income-tax department may consider trading of Bitcoins and other cryptocurrencies as capital gains or speculative income,” said Amit Maheshwari, partner, Ashok Maheshwary &Associates LLP.
3-month Deadline from RBI
“Speculative business income would attract about 30% tax,” he added. Tax experts said 20% long-term capital gains tax would be levied if cryptocurrencies were held for at least 36 months.
In all other cases, short-term capital gains tax at 30% would apply. Other advisers are however asking investors to stick with 20% tax as virtual currencies may still not be illegal.
“While the RBI’s statement does make investments in Bitcoins or any other cryptocurrency more difficult, I don’t think such investment is still illegal,” said Riaz Thingna, director, Grant Thornton Advisory. “For many investors who may have exited the investments in the last two days, normal capital gains tax at 20% on the returns must be levied if the holding is long term and 30% in other cases.”
The regulator said it will give entities three months to unwind their business relationships. “In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs (virtual currencies),” the central bank had said on Thursday. “Regulated entities which already provide such services shall exit the relationship within a specified time.”
Industry insiders said that many investors had also reached out to the income tax department and are now planning to define their gains or losses from such currencies as speculative business income.
Some investors are also looking to set off gains from virtual currencies against losses on other speculative businesses, said people in the know.
“Such speculative loss from Bitcoin or any other cryptocurrency cannot be adjusted against non-speculative income but can be adjusted against gains in other speculative assets,” said Maheshwari. “Traders won’t be able to set off their losses against profits from other assets since there is a possibility that the trades can be declared illegal as it was never the intention to allow them in the first place.”
The I-T department had earlier issued about 500,000 notices to Bitcoin and other cryptocurrency investors and sought answers to 28 questions.
In several cases, investors have also booked losses after trading in cryptocurrencies. These investors are looking to set off losses against other speculative income such as that from grey market commodity trading or income from unknown sources.
Bitcoin was trading at $6,613 on Friday, according to the Coin-Desk Bitcoin Price Index. Prices have crashed by about 49% in the past month and many Bitcoin experts expect them to drop further in the coming weeks. Before Friday’s announcement, the Indian government and the RBI have issued several warnings against dealing in cryptocurrencies including bitcoins.