Things to Know About Cryptocurrencies and Taxes on Their Gains in India
Recently, the IT Department of India sent more than 1 lakh tax notices to people who’ve been transacting in cryptocurrencies. Due to this, the issue of taxing cryptocurrencies in the country has turned urgent and important.
It is said that the government is working to create a regulatory framework for these digital currencies and the same would be implemented after the Union Budget of 2019. This framework would bring in the much-needed clarity about how these virtual currencies would be taxed in India. While the framework is still being planned, let us have a look at how they might be taxed under different scenarios.
Capital Asset or Currency
As per the FEMA (Foreign Exchange Management Act) of 1999, currency includes the fiat currency notes, postal orders, postal notes, cheques, traveler’s cheques, drafts, money orders, bills of exchange, promissory notes, credit cards and related instruments notified by the RBI.
If a lot of entities start accepting Bitcoin or other cryptocurrencies as a mode of payment, it might be considered as a currency. However, it is still not considered as a form of currency under the FEMA Act and the RBI has already mentioned that the currencies are not a legal tender in the country. Until the time the government or the RBI clears the air, whether these currencies are a legal tender or not is still a disputed matter.
If the center declares these currencies as legal tenders, all the transactions in them would be subject to the FEMA regulations.
Business Income or Capital Gains
A capital asset as per the IT Act of 1961 is any property held by an individual irrespective of whether or not the asset is related to the individual’s profession or business. Here, the term ‘property’ carries no statutory meaning. However, it does signify any possible interest which an individual can hold, enjoy, or acquire.
As per the IT Act, cryptocurrencies can be termed as a capital asset when an individual purchases them as a form of investment. All the gains rising from buying, selling, or transacting in these currencies would be taxable just like the capital gains tax on other investment assets. But if an individual transacts in virtual currencies on a frequent and substantial basis, it might be termed as the individual is trading in these currencies. In that case, this would be treated as business income and would be taxed in the same manner.
Calculating Capital Gains on Selling Cryptocurrencies
If the center decides to treat the gains that arise from transferring cryptocurrencies as capital gains, the gains would then be classified into two categories- long-term capital gains and short-term capital gains on the basis of the duration for which an individual held positions in these currencies. Holding them for more than 36 months would make it a long-term asset and it’d be called short-term asset if held for a lower period.
As per the current IT laws, long-term capital gains are taxed at 20% along with the indexation benefits whereas short-term gains are determined as per the tax slab rate of an individual.
Mining is a process through which new cryptocurrencies are generated. Many of the cryptocurrencies like Bitcoin, Ethereum, Monero, etc. can be mined. Apart from mining, a lot of currencies like LISK, NAV, NEO, ReddCoin, Stratis, etc. also support POS (Proof-Of-Stake) algorithm where the mining power an individual receives on their system depends on their holdings in that particular currency.
If the profits from cryptocurrencies are termed as business income and are taxed in the same manner, the cryptocurrencies generated through mining or staking would also be treated as business profits. But if these currencies are termed as capital assets, ones earned through mining or staking might not be taxed.
The cryptocurrencies that are generated through staking and mining could be classified as capital assets that are self-generated. As an individual involved in mining or staking does not pay any money for having these currencies as other people who buy them, there could be no tax applicable on such crypto earnings.
In this case, the individual might be able to take advantage of the Supreme Court’s ruling in the 1981 case of B. C. Srinivasa Setty. In this case, the honorable Supreme Court said that if the acquisition cost of an asset is not ascertainable, the calculation for capital gain on such assets will fail. This means that there might not be any capital gains tax that could be levied on such currencies generated through mining and staking.
Cryptocurrency Mining and GST
Bitcoin or cryptocurrency mining is a process where individuals used specialized software and high-end systems to process crypto transactions. For their service, they are awarded the cryptocurrency they mine. As cryptocurrency miners offer a service of keeping the cryptocurrency network secure and process the transactions, as per GST regulations, they might have to pay taxes at the rate of 18% of the cost of the currency.
Location of Cryptocurrency for Taxation
Cryptocurrencies are intangible. For the purpose of income tax, the location or situs of assets that are intangible in nature varies as per the nature of the asset. In case of intangible properties, the location is decided as per the law of land where the property protection is sought. As a result, the sitescan be linked to the tangible property with which the intangible asset is connected.
For instance, in case of patents, the machinery and plant are considered as the tangible property and in case of brand names and trademarks, goods are considered as the tangible property. According to this, the situs or location of cryptocurrencies could be linked to the location of the operating server of the currency.
As per the current tax laws and regulations, these are some of the ways in which cryptocurrencies can be taxed in India unless the country decides to go the Denmark way where cryptocurrency trading is entirely tax-free. Denmark is aiming to be the first cashless economy in the world and the Danish rules are as such to achieve this goal.
With the Indian government too encouraging digital economy, tax-free cryptocurrency trading is definitely worth consideration. While this is definitely a very wild assumption for a country like India, the move would definitely boost digital transactions. Until then, unless the government decides to form an entirely new framework for cryptocurrency trading, which again is almost impossible, these are the ways in which the digital currencies might be taxed in the country.