Taxation Of Cryptocurrency Transactions
Since historical times, we can say that currency was having prominence in every manner. And even the cavemen had their own way of functioning with a currency. For this, they used the barter system, in which people exchange goods and services instead of exchanging the same for some definite amount of paper currency or money. Later on, this barter system was eliminated as it was possible only when the people’s requirements coincided say, you have 3 apples but want 5 oranges in place of the same, then it will not be easy to find a person with a need for 3 apples as thought. This system also lacked a common measure of value and there were issues with regard to the divisibility of the goods which are to be traded among the people, say you can divide animals or such other commodities for the ease of trading and the ease in transportation of goods also placed a hindrance to the barter system.
Due to all these, the concept of official currency came into prominence starting from gold-plated florins to the paper currency which gained widespread popularity around the globe. And this is now even more elaborated with the modern currencies like:
– Paper currency,
– Coins,
– Credit or Debit Cards,
– Digital Wallets.
And as we all know, the above said form of currencies are controlled and regulated by the government authorities and banks of a country. So, there are certain limitations that might come before a layman while using any of these modes of currency payments.
For example, you purchased a product from a hypermarket, and you want to make the payment by transferring the same to the entity’s account. There are certain challenges or limitations which might abort such transfer of amount from your bank account to the entity’s account like, a technical issue where the banks systems or servers are down, that the account was hacked or the transfer limits were beyond the allowed limit by the bank and its policies.
And this makes cryptocurrency prominent and futuristic as this is simple in terms of usage and transfer as there are no limitations for fund transfer, no safety issues arising from hacking, or no point of technical issue or failure lies in the same.
What is cryptocurrency?
It is, “a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.”
Some of the players in this industry since years are Bitcoin, Litecoin, Ethereum, Z-cash, and many more which are coming into the market day by day.
Cryptocurrency does not have a physical embodiment and holds a limit to how many units of it can exist. It makes the verification of transfer of funds easy and need not have a bank for operating. And new units can be added to the currency only when the new block has been added to the blockchain.
How is cryptocurrency acquired or generated?
It can be generated through the following manners:
- Mining: An individual miner would use computing technology to solve complicated algorithms or codes or equations and then record this data on the blockchain, which is nothing but a collection of records linked with each other, strongly resistant to alteration, and is protected using cryptography. And in exchange for such work, one may be rewarded with new crypto token payments.
- Buying: This includes buying cryptocurrency from currency exchanges using the real currency owned by one and storing the same in the online form using a digital wallet.
- As legal tender: Where it is used as consideration for the sale of goods and services instead of making the payment for the same using the real currency.
Tax Implications of CryptoCurrency under the Income Tax Act
The Reserve Bank of India (RBI) has not yet notified Bitcoin or any other cryptocurrency for that matter of legal standing in India, due to which there are no proper rules, regulations, or laws pertaining to the same defined or explained. Hence, experts to date are reading or speculating the available rules or sections for taxation of such incomes earned by the assessee. The tax implication of same with respect to different heads of income under Income Tax Act has been detailed under:
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Income from Salary and Income from House Property:
As the Indian Government has not recognized cryptocurrency as a legal tender in the country, an employer cannot pay his employee by using cryptocurrency for the services rendered. Similarly, a tenant cannot pay his or her landlord using cryptocurrency for using space.
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Profits and Gains from Business or Profession:
The income tax of cryptocurrency which would be taxed under this head will be the one that is received for the sale of goods or services and also the sale and purchase of the cryptocurrency as stock in trade. So, any profit or gain which is made by the assessee on account of the sale of goods or services or the sale and purchase of cryptocurrency using same shall be taxed under Income Tax Act by virtue of section 28.
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Income from Capital Gains:
Under the Income Tax Act, section 2(14) defines a capital asset as, “property of any kind held by the assessee whether or not connected with his business or profession”. Capital asset includes all assets movable and immovable except those which are specifically excluded by the Act through the definition. So, any gains arising out of the transfer of cryptocurrency must be considered as capital gain income, provided they are held as investments.
If the currencies are held for short-term say less than 3 years/2 years then short-term capital gain at the rate of normal tax slab rates by adding the same to the gross total income shall be applicable. And if it was held for long-term say more than 3 years/2years then a flat rate of 20% shall be applicable on the same.
Here 3 years or 36 months applies to the movable assets like e.g.: gold or jewellery while, 2 years or 24 months applies to the immovable assets like e.g.: land or building.
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Income from Other Sources:
This specifically includes the incomes derived by the assessee from the mining of the cryptocurrency along with the receipt of cryptocurrency in the form of gifts.
The digital currency generated through mining shall be treated as self-generated assets but the same cannot be taxed under the head income from capital gains as the Section 55 of the Income Tax Act which deals with the cost of acquisition and cost of improvement does not recognize mining. Hence the same shall be taxed under this head at fair value or the cost basis of the coin if the price at which the miner mined it. A deduction with regard to the equipment or any resources used for the same can also be claimed if the same was done as a part of your mining business and not the personal gain.
As gifts received by an assessee are generally taxable under the head income from other sources, under individual tax slab rates, the cryptocurrency received by the assessee in the form of gift above the worth of INR 50,000 shall also be taxed under the Income Tax Act as income from other sources.The exemptions to the other gifts received by the assessee under the Income Tax Act shall apply to the gift received in the form of cryptocurrency also. Say when it is received;
– From relatives
– On the occasion of marriage
– Under a will or by way of inheritance.
Tax Implications of CryptoCurrency under the GST Law
Until and unless the cryptocurrency and transactions involving the same are exempted or kept out of the purview of GST, any person involved in the transactions of cryptocurrency should pay GST to the government. Indian Crypto Exchanges already charge GST from the users by adding the same in the trading fee that is added to the price of the Bitcoin or other currencies traded in the country. And this would then be paid by the exchanges to the government.
The Central Board for Indirect Taxes and Customs (CBIC) was given with a proposal by the Central Economic Intelligence Bureau (CEIB) for bringing cryptocurrency exchanges and platforms under the purview of GST and levy GST at the rate of 18% along with making the registration mandatory if the income or annual revenue of the cryptocurrency minors exceed INR 20,00,000 during a year.
Hence, we can now conclude that with all the advancements in technology and digital cash, cryptocurrency would be taken or adopted by millions of new users on a day-to-day basis for having seamless transactions and earning without having fear for the security of the same.
