Crypto Assets: Own Crypto Assets? This is how you will pay income tax
The cryptocurrency space in India has been subjected to significant regulatory challenges. It all started with a circular issued by the Reserve Bank of India on April 6, 2018, which prohibited banking facilities from being offered to participants involved in cryptocurrency transactions. In March 2020, the Supreme Court overturned the RBI circular on constitutional grounds and affirmed the fundamental right of virtual currency trading to trade. It is estimated that around 5 million traders in India traded on 24 exchanges, with trading volumes of around 1,500 Bitcoins per day translating into a volume of Rs 1 billion. According to moneycontrol.com, the volume of cryptocurrency exchanges in India increased by 400% during the nationwide lockdown.
On March 24, 2021, in what could mark the first step taken by the government to regulate cryptocurrencies and related transactions in India, the Ministry of Commercial Affairs made it mandatory for companies dealing with virtual currencies to disclose profits or losses incurred on cryptographic transactions. and the amount of cryptocurrency they hold on their balance sheets as of the closing date. These changes were made to Annex III of the Companies Act with effect from April 1, 2021.
India’s income tax law is still unclear on the tax impact on earnings from cryptocurrencies. It should be noted that Indian tax authorities have yet to classify cryptocurrency returns within a specific range and there has been no judicial precedent in this regard.
To understand the taxation of cryptocurrencies, one needs to look at the classification of cryptocurrencies, i.e. is it a currency or goods / properties?
How are cryptocurrency transactions in other countries taxed?
UNITED STATES: The Internal Revenue Service ruled in 2014 that cryptocurrencies should be treated as “property,” meaning they should be taxed as capital property other than in situations where cryptos are obtained from activities. mining.
Singapore: Companies that trade virtual currencies in the course of their activities are taxed on profits as business income. Entities holding cryptocurrencies for long-term investment purposes are not taxed because there is no capital gains tax in Singapore.
UK: If a person buys and sells crypto assets with such frequency, level of organization and sophistication that the activity is akin to financial trading, then it will be taxed as a trading profit / loss, otherwise it will be subject to capital gains tax.
Taxation of cryptocurrency transactions in India
If the cryptocurrency is to be classified as a currency, then such transaction will not be taxable under the Income Tax Act 1961 (“ITA”). Cryptocurrencies are not recognized as currency by the RBI and the word “income” as defined in Article 2 (24) of the ITA provides an exhaustive list that does not cover “money” or “currency”. . On the other hand, if cryptocurrency is considered a property / asset, it would fall under the headings of “Capital Gains” or “Profits and Gains from a Business or Profession”.
The fact that the cryptocurrency gains will be taxed is now certain with the Minister of State for Finance, Mr. Anurag Singh Thakur specifying on March 28, 2021 that “the gains resulting from the transfer of cryptocurrencies / assets are subject to the ‘tax under a head of income, according to the nature of the detention thereof ”.
Thus, it is established that cryptocurrencies will not be treated as currency by India and will be payable for tax. The key question is whether virtual currency income is treated as capital gains or business income. If a seller is a trader by profession, the income should be taxed as business income. If it is not business income, that income would be taxed as capital gains.
Taxability under “Capital gains”
Cryptocurrency can be considered an asset if it is purchased for investment purposes by a taxpayer. In accordance with Article 2 (14) of the LIR, an asset means property of any kind owned by a person, whether or not it is related to his business or profession. Although it does not have a statutory meaning, the term “property” refers to any possible interest that a person may acquire, hold or enjoy. Therefore, any gain resulting from the transfer of cryptocurrency can be considered a capital gain, if it is held for investment purposes.
Infrequent crypto transactions could be treated as long-term or short-term capital gains, depending on the period of ownership. If investors hold cryptocurrencies for 36 months or more, the gains would be taxable as long-term capital gains, and if they are less than 36 months, they would be short-term capital gains. Short-term capital gains are taxable at the slab rates applicable to a taxpayer. And long-term capital gains are taxed at the flat rate of 20% with the benefit of indexation.
Impossibility under “Profits and gains from a business or a profession”:
However, if the transactions are substantial and frequent, it could be considered that the taxpayer is trading in cryptocurrencies and any profit therefrom would be taxable as business income. Likewise, if cryptocurrencies are held as “trading stocks” then the income from them will be taxable as business income. Therefore, the continued trading activity of cryptocurrencies and the profits made will be taxable as business income. Although the tax authorities may take a position that such exchanges are treated as speculative income which would have a negative impact on taxpayers.
In conclusion, virtual currencies can boost India’s digital infrastructure and lower infrastructure costs for banks attributable to cross-border payments, securities transactions and regulatory compliance. We still need clarity from the government on the taxation of cryptocurrencies, especially on issues such as the treatment of capital gains or business income, classification as speculative income, eligibility for the compensation and carry-over of losses; and the enforceability of provisions relating to deemed gift tax.
(The author, Harsh Bhuta, is a partner at Bhuta Shah and Co LLP. Opinions are his)