Digital currencies are referred to as cryptocurrencies. Cryptocurrencies are digital assets that can be transferred from one person to another digitally, despite the fact that they cannot be physically exchanged as paper currency. Cryptocurrencies have grown in popularity in recent years as a result of the Bitcoin hype.
Despite their widespread use, cryptocurrencies are still illegal in many nations throughout the world. However, this does not imply that their transactions are illegal. Cryptocurrencies are illegal, which means they cannot be used to buy goods or services in the country. It is not against the law for them to transact and trade. Crypto trading is, in reality, similar to stock market share trading. Coinbase is a famous cryptocurrency exchange that allows users to purchase and trade cryptocurrency.
With over 10.03 crore people, India has the biggest number of cryptocurrency owners in the world. Although cryptocurrency is not allowed in India, it is also not fully prohibited.
How does the tax system work on cryptocurrencies?
Cryptocurrencies can be obtained in one of two ways: through crypto exchanges or through mining.
Mining is the process through which a person known as a miner utilizes computers to create new crypto currencies. Solving sophisticated algorithms, codes, or mathematical puzzles is how mining is done. When a miner successfully mines a crypto currency, he will receive a portion of the coin, while the remainder will be disseminated through crypto exchanges.
During crypto trading, taxes only work in one direction. In the sense that you will not be required to pay any tax while purchasing a cryptocurrency, but you will be required to pay tax when you gain revenue from selling cryptocurrencies. If you get money in your bank account as a result of selling bitcoins, you will be taxed on that money.
The tax system also operates in two different ways depending on the time period. If you profited from selling cryptocurrencies within 36 months of purchasing them, the revenue is classified as other income on your tax return. If you pay according to your tax bracket, your profit will be taxed accordingly.
If you hold a cryptocurrency for more than 36 months and make a profit by selling it later, the gain is subject to long-term capital gain tax, which means it will be taxed at a rate of 20% plus any applicable surcharges and cess after-induction. Your tax amount will be determined after changing the calculation index, resulting in a lower tax amount. The cost inflation issued by the Central Board of Direct Taxes each year is used to construct the inflation index.