Lost Bitcoin - Can you claim a tax deduction in India?

Neither the Income Tax Act, 1961, nor the Central Board of Direct Taxes stipulates any specific tax treatment for income earned from investments in cryptocurrencies. Under the Act, income earned from the sale of cryptocurrency can be taxed either as income from capital gains, or as profits/gains from business or profession. The classification of income and its computation mechanism are determined by whether an individual holds cryptocurrency as an investment or stock-in-trade.

Capital gains: 

Cryptocurrency in its generic meaning gives the holder exclusive rights to access/spend and may likely be qualified as a financial asset, as the Indian regulatory framework does not consider them legal tender. The Act defines capital asset broadly to include any kind of asset, interest or rights in a property, unless specifically excluded. Cryptocurrency is not specifically excluded from the definition of capital asset.

The difference between sale consideration, cost of acquisition and expenses incurred on transfer of cryptocurrencies is considered as capital gains. The cost of acquisition is the cost of purchase of such cryptocurrency plus the broker’s commission or wire transfer fee . Since cryptocurrencies are held in an electronic wallet, in case of purchase of cryptocurrency at various points of time and cost, it becomes fungible, which leads to issues with identifying which tranche of purchase is being sold and the cost of acquisition. In such a case, the taxpayer must adopt a first-in-first-out method to determine the cost of acquisition.

The capital gains are further classified into short-term or long-term gain depending on the period for which such an asset is held. Gains earned on cryptocurrency held for less than three years from the date of acquisition are considered short-term gains and taxed as per applicable slab rates (top tax rate 42.74%), while those held for more than three years are considered as long-term. The gains are subject to a beneficial tax regime (top tax rate 28.49%). The taxpayer is also eligible for indexation benefit on the cost of acquisition. In case one cryptocurrency is bartered with another, each swap shall be considered a transaction and be subject to capital gains tax. The taxpayer shall be required to report and pay taxes on each such disposal. Considering the recent fall in cryptocurrency prices, some investors would also have incurred capital loss while selling cryptocurrency. These losses can be set-off against gains from sale of other assets, subject to existing rules.

Income from business or profession:

Taxpayers who speculate on short-term price movements, or who hold the cryptocurrency as stock-in-trade may be considered as traders. Whether a person qualifies as trader or investor depends on aspects including frequency in buying and selling, period of holding, and intent of investment. Where a taxpayer qualifies as a trader, any income earned from sale of cryptocurrency shall be taxed as income from business or profession. Taxpayers should also evaluate whether the income shall be considered as speculative income or not. Whether the income is considered speculative or not will depend on whether the cryptocurrency is considered a commodity and is periodically or ultimately settled otherwise than by way of actual delivery or transfer of such commodity.

Return disclosures: 

Taxpayers whose income exceeds ₹50 lakh in a year are required to report their assets and liabilities in Schedule for Assets and Liabilities along with cost of acquisition. Since cryptocurrencies are also regarded as assets, taxpayers shall include cryptocurrencies in the said Schedule.

Additionally, taxpayers who qualify as resident and ordinary residents are required to disclose overseas income and assets in the tax return. Considering the tax and penal consequences under the Act and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, it may be prudent for taxpayers to disclose the cryptocurrency holdings in the foreign asset or income schedule.

Lost Bitcoin - Can you claim a tax deduction in India?

Given the above scenario wherein there is no regulation or taxation rules defined for computation of Gains from cryptocurrencies, one cannot make a declarative statements.

We can look at the treatment in Income tax for another capital asset such as Stock. If an investor does not have or has lost their stock certificate, they are still the owner of their shares and entitled to all the rights that come with them similiar to cryptocurrencies. However, If an investor wants a stock certificate, or if it is lost, stolen, or damaged, they can receive a new one by contacting the issuing company's transfer agent unlike cryptocurrencies. So we cannot conclude what could be the scenario around lost  cryptocurrencies whenever Government bring out the law and regulations around it. 

DISCLAIMER

The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that we are not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. CA Mitesh and Associates is Mumbai's leading Cryptocurrency Taxation Firm which is committed to helping people navigate complex tax laws and banking regulations. Our main aim is to assist the individuals with applicable laws & regulations compliance and providing support at each & every level to make sure that they stay compliant and grow continuously. For any query, help or feedback you may get in touch here - Appointment with CA. Please note the all consultations with the CA are Paid consultations.

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