The tax department and buyers are in a dilemma over how to calculate profits on crypto for taxation purposes, especially since tax regulations lurch and there exist disagreement against specific laws and tax is computed on the value declared by the assessee.
The big query that’s worrying all is how the profits from crypto assets to be computed? By supposing that cryptos purchased first will be sold first (first in first out/FIFO) or by supposing that the ones purchased last were sold first (last in first out/LIFO)?
According to the tax experts, the difference is that if going the ‘FIFO’ way, then the tax will be on the profits. And if LIFO is applied, there will be no taxes.
The FIFO method should be used for the purpose of taxation. But, currently, there is no certainty around this primarily because even the asset class isn’t defined.
Tax is usually imposed on profits. That is selling price minus cost price. Tax experts said that but because of the nature of the cryptos, determining the cost and the gains have become tricky.
The main issue for taxation is that there is no transparency on what cryptos are. That is, whether they are assets, currencies, commodities, or something else. Traders and investors will be able to get around taxation till that is declared. The other issue is that tax rates may also vary for someone who trades for a living and someone who is an investor.