Crypto Taxes: A New Tax for a New Currency

Cryptocurrencies could possibly the future of money. These digital assets utilize strong cryptography to secure and regulate transactions. Any cryptocurrency has to meet 6 conditions.

• The system should not have central control, it should be regulated through distributed consensus.
• The blockchain or ledger should contain cryptocurrency units and their ownership.
• The system should define the production of new units of the cryptocurrency. If new units of cryptocurrency are produced, the system determines their point of origin and ownership.
• Authentication of ownership can only be done cryptographically.
• Member nodes of the network issue transaction statements that prove the ownership of the cryptocurrency.
• In case two different instructions are provided for the same units of a cryptocurrency, the system will only perform one of the instructions.

How are cryptocurrencies taxed?

The cryptocurrency market in India is presently quite uncertain, and therefore, there aren’t clear tax regulations when it comes to cryptocurrencies. Even though there aren’t any solid tax regulations around cryptocurrencies they are still taxed under the law and therefore it is imperative to know how to file crypto taxes, and there are free crypto tax calculators available to calculate taxes and more.

The first thing to note is that the Income Tax Department does not concern itself with the origin of your income, it is only concerned with the fact that you pay the taxes due on your income. So even though there are no tax regulations in place for cryptocurrencies, any profits or gains made from transactions in cryptocurrencies are taxable. For the purpose of speculation, we will categorize cryptocurrencies under the head of Capital Assets. Capital Assets are defined in Section 2(14) of the Income Tax Act, 1961.

The period for which a cryptocurrency is held before transacting with it determines the head under which it will be taxed. If a cryptocurrency is held for a period longer than 36 months before transactions it will be considered a long-term capital asset and the differential between the buying price and selling price will be taxed at a flat rate of 20% with the benefit of indexation.

If the cryptocurrency is held for a period shorter than 36 months this will be considered a short-term capital gain and will be taxed in accordance with your tax slab. However, if the cryptocurrency is used for regular trading, any profits or gains from such activities will be considered an income from business and will be taxed under the head of Income from Business Activities. There are three instances where tax can arise on the transfer of cryptocurrencies. Also read about Bitcoin Tax Software.

Transfer to fiat currency

When a cryptocurrency is exchanged for a fiat currency, the price differential between the buying price of the cryptocurrency and selling price will be considered taxable income. The duration for which the Bitcoin is held will determine the head under which it will be taxed.

Payments received in cryptocurrency

Many businesses and startups in India receive payments for goods and services provided by them in cryptocurrencies. Any payments received by a business in cryptocurrency will be considered a business income and will be taxed appropriately under the head of profits and gains from business activity.

Mining

Even though crypto mining is a capital intensive activity that consumes a lot of electricity and requires expensive hardware. The units of cryptocurrency generated as a result of mining are self-generated, and therefore, the cost of acquisition cannot be determined.

Even though Section 55 of the Income Tax Act, 1961 dictates the calculation required to be performed in case of self-generating assets, it does not include Bitcoin mining. Therefore, it is not clear how Bitcoin mining will be taxed under future regulations.

Legality of cryptocurrencies in India

The treatment and regulation of cryptocurrencies in India can be broadly divided into two periods, the Pre-April 2018 period and the Post-April 2018. Pre-April 2018 saw the rise of cryptocurrencies in India and the development of cryptocurrency trading markets in India which had minimal governmental or regulatory oversight. The Post-April 2018 saw the heavy restriction of transactions involving cryptocurrencies in India and the consequent shutdown of cryptocurrency trading markets in India. In this section, we will see the regulatory regime governing cryptocurrencies in India and the possible legislative measure that the Government of India might take.

Position of RBI on cryptocurrencies

The Reserve Bank of India (RBI) and other governmental regulatory authorities in India have been quite wary of the use of cryptocurrencies in the Indian financial market. On December 24, 2013, the RBI issued a press release cautioning users of the potential risks involved with transacting and trading in cryptocurrencies. Following the press release, many cryptocurrency aggregators in India shut operations. In 2017 the RBI issued two notices cautioning users that no licenses had been issued to cryptocurrency aggregators and operators.

Subsequently, the RBI issued a report stating that cryptocurrencies were volatile in nature, were not backed by any authority, had no intrinsic value and could be a potential threat to the Indian monetary system. The report did, however, highlight the benefits of blockchain technology and its potential to streamline the monetary system in India. It also recommended the development of a national digital currency, much like the system adopted by Canada.

In April 2018 the RBI issued a notice to all entities regulated by it, prohibiting these entities from dealing in virtual currencies or providing services to facilitate virtual currency transactions. These services included maintaining accounts, registering new accounts, clearing, settling, giving loans against cryptocurrencies, accepting them as collateral for loans, opening accounts for cryptocurrency exchanges, and transferring or receiving money in accounts related to the sale or purchase of virtual currencies. The RBI gave all these entities 3 months to cease all activities related to cryptocurrencies.

Position of the Government of India on cryptocurrencies

On November 2, 2017, a high-level Inter-Ministerial Committee (IMC) was created to research the issues related to transactions with cryptocurrencies. In February 2019 the IMC released a report that categorically stated that private cryptocurrencies had no intrinsic value and that they should be prohibited in India. The report also had recommendations to ban all cryptocurrencies in India with the exception of the ones issued by the Government of India. The report also recommended the RBI to develop an official digital currency in India.

In light of the report issued by the IMC, the GOI proposed the introduction of legislation banning the use of cryptocurrencies in India. A draft of the ‘Banning of Cryptocurrencies and Regulation of Official Digital Currency Act, 2019’ was included in the IMC report. This Act prohibits any entity from holding, selling, dealing in, mining, generating, issuing, transferring, using or disposing of cryptocurrency in India.

According to this proposed piece of legislation, cryptocurrencies are defined as

“Cryptocurrency, by whatever name called, means any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes.”

The future of cryptocurrencies in India looks quite bleak, especially with the draft bill proposing a complete ban on cryptocurrencies. While the private cryptocurrencies in India seem to have a bleak future the government favors associated technology like blockchain and the open ledger system. The IMC also noted that the development of a distributed ledger system should be the focus of regulatory authorities in India. The Government of India proposes to introduce a Crypto Bill during the winter session of the parliament.