The JSBF Report
Taxation of Cryptocurrencies
By - Aadya Aggarwal
Source: Crypto News Flash
If you are a millennial or you're interested in finance and investing, you must already know about arguably, the ‘hottest investment’ in today's times – cryptocurrency. The king of cryptos, Bitcoin, started trading at about $0.0008 to $0.08 per coin in July 2010 and as of October 2021 its price was $48181.88. You don’t have to be a mathematically bright person to see that cryptocurrency such as Bitcoin has grown exponentially as much as 230%, in as little time as a decade. Cryptocurrencies are digital currency, they do not exist physically, and their records are maintained and verified by a decentralized system rather than by a centralized authority. Their tremendous success can be attributed to them being public, irreversible, controlled by the public, and mostly un-hackable and very secure as it uses the blockchain network to operate.
A CNBC survey finds that 1in 10 people currently invest in cryptocurrencies as of 2021 June. The global crypto ecosystem was recently estimated to value around $2.02 trillion by Coinmarketcap. Governments around the world have only recently identified this market as a valuable and lucrative opportunity. The Indian government and the RBI (Reserve Bank of India) along with the industry, are looking to find solutions to put reasonable security and accountability constraints on this booming sector. One of the aspects of its regulation pertains to how cryptocurrencies should be taxed. India’s first cryptocurrency legislation is currently in the parliament. It's still speculative but the government may classify cryptocurrencies as commodities, a digital asset rather than a currency. It is particularly important to clearly define crypto currency in this bill as that will help define how cryptos will be regulated and taxed in the future.
Famous CEO’s such as Elon Musk of Tesla and Jack Dorsey of twitter have made open statements in support of cryptocurrency and the governments too should adopt these tokens and henceforth announce their stand on its regulation and taxation soon.
Since the RBI has not yet granted a legal tender to crypto’s, there are no clear rules for its taxation. However, many experts have made speculations as to how the Income Tax act, 1961 (“IT Act”) and the Central Goods and Sales Tax Act, 2017 (“CGST Act”) could be applicable.
Under the Income Tax Act, 1961 cryptocurrency should be taxable as follows-
Crypto consideration for sale and purchase of goods or services and sale and purchase of cryptocurrencies as a stock in trade would be taxed as profits and gains from business and profession, under Section 2(13) and Section 28 of the IT Act.
Income arising from the mining of crypto currency, dealing in cryptocurrency solely as an investment, and the receipt of cryptocurrency as a gift would be taxable under the IT Act under the head ‘Income from other sources. Section 55 of the IT Act deals with the cost of acquisition and movement, but it does not recognize mining, however, since the digital currency would be a self-generated asset it is not certain as to how it will be taxed or whether the capital gains provision would apply. While receiving it as a gift, it would be taxed under the individual slab rates and over the value of RS. 50,000 it would be wholly taxable. Some exemptions may be made if received from relatives, on the occasion of a marriage or under a will, by way of inheritance.
If cryptocurrencies are used to pay salaries or rent, it will not be taxable under the present situation as cryptos don’t have a legal tender yet and hence such a transaction would not be legally recognised by the government.
Under Section 2(14) of the Income Tax Act, capital assets are described as ‘property of any kind held by the assessee whether or not connected with his business or profession’ and it includes all kinds of property unless specifically excluded by the act. Thus, any gains from transfer of cryptocurrencies should be considered as a capital gain and taxed based on the duration for which they are held as an investment. If short term they would be taxed under the individual slab rates and if held for the long term they would be taxed at 20% post indexation.
However, since this is all speculative as the cryptocurrency regulations in India currently are ambiguous, many Indians buy and sell digital tokens on foreign platforms. These platforms offer better features and customer service. Experts and analysts believe that the government may levy 18% GST (Goods and Service Tax) on transactions on foreign crypto currency exchanges as well as an added 2% to level with domestic exchanges, on such transactions, in accordance with the CGST Act of 2017. The government may come up with a system where they allow only certain authorized digital tokens or only trades made on certain recognized platforms. The possibility of there being a special interest rate to tax profits made on cryptocurrency is also inherent.
The regulation and taxation of cryptocurrency would prove to be a useful source of revenue to pay off the large fiscal deficit the Indian economy currently faces. A positive stance of the government would also encourage more start-ups in this sector and in turn increase employment in the economy. A government backing will encourage more public participation as well and contribute towards the growth of the crypto currency ecosystem.
Aadya Aggarwal is a second-year student at JSBF. You can check her profile on LinkedIn.