A common confusion that prevails among taxpayers relates to tax on earnings accruing from investments in cryptocurrencies such as Bitcoin, ethereum, Dogecoin and other similar digital currencies. Furthermore, a majority of taxpayers remain ignorant about disclosures and furnishing related information on cryptocurrency holdings in the income tax return (ITR) forms.

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For starters, cryptocurrency holdings are taxed like any other capital asset defined under Section 2(14) of the Income-Tax Act, 1961. This Section defines a capital asset as any kind of property held by a person, whether or not connected to business or profession.

More importantly, gains from cryptocurrencies can be reported in two ways in an ITR form by taxpayers. First, 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, Sujit Bangar, founder of TaxBuddy and Finbingo told CNBC-TV18.com.

While, when they sell the cryptocurrency, the gains or losses are to be reported as ‘income from capital gains'. The calculation of tax levied on cryptocurrencies will here take into account the period of holding.

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If they held the asset for less than 36 months, then the gains or losses will be short term and, in case, it is held for more than 36 months, then the gains or losses shall be long-term.

In Bitcoin's case, the holders of the cryptocurrency can be of two types — miners and investors, said Rajasekhar Reddy Pallala, Chartered Accountant at IndiaFilings.

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"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. On the other hand, the cost of acquisition and sale value on the sale of purchased bitcoins can be determined in the case of investors. So the gain or (loss) on the sale of bitcoins are taxed as short/long term capital gains (loss)," Pallala told CNBC-TV18.com.

Experts say that it is advisable to get in touch with any advisor before disclosing crypto earnings in ITR forms.

Meanwhile, the government recently extended the deadline for filing the income tax return (ITR) for the financial year 2020-21 (the assessment year 2021-22) to December 31, 2021. According to the Income Tax Act, ITR filing is compulsory for individuals earning a specified amount of income in a year.

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