I bought something with Bitcoin and now I have to report it on my tax return?
Yep. If you’re a Indian tax filer and you purchased something with bitcoin, then the Department of Income tax would like that you report this on your tax return – including the 2021 tax return that’s due here, soon.
This is because the regulation in India neither classifies Bitcoin as “property” nor “currency”. Currency is something that comes under purview of Reserve Bank of India and they have clarified stand in past. This means that it is probably a capital asset, where you have to track the price, you acquired it for and the price you sell it at. So, when you are in fact buying something with bitcoin you are in effect selling it as well due to this specific capital asset classification.
What’s a capital asset? Examples of capital assets are real estate, factory equipment, and heavy machinery – ironically, assets that are thought to not be easily convertible to cash and are expected to be held longer than one year. Therefore, due to the fact that bitcoin is considered a capital asset, if you hold it for less than a year and it’s worth more than what you bought it for when you use it to purchase something, you have to pay a short term capital gains tax. This is the same tax rate that you would pay for your income tax bracket.
This starts to get a little tricky if you have several instances where you purchased bitcoin and need to figure out which purchase price you want to ascribe your bitcoin redemption to when you’re paying for lunch or dinner.
Why is it tricky? Well, first off, in most cases the purchase quantity of bitcoin is not identical to the redemption amount. In other words, let’s go back to the buying a dinner example – let’s say in January of 2020 you purchased 1,00,000 INR worth of bitcoin. In February you purchased another 2,50,000 INR of it. In July you sold the equivalent of 75,000 INR. In August you bought another 10,000 INR. In November you purchased 3,000 INR worth. And in December you paid for take-out with 3,000 INR worth of bitcoin.
What is the purchase price you need to compare your dinner purchase with to correctly report this capital asset transaction on your tax return?
Keep records of transaction and prices is cumbersome task, Catax will automatically import all of your transactions FY 2021 and calculate your gains and/or losses. In most cases, this takes just a few minutes. Afterward we’ll provide audit report which makes it super easy for you or anyone else to file tax return.