Cryptocurrency / Bitcoin Taxation Concepts in India
Cryptocurrencies / Bitcoin have been subjected to the spotlight of the decade and have been grabbing the attention of the tax authorities essentially due to the high prices at which they were seen trading on exchanges in India and across the globe and the regulatory mechanism of taxation has to be determined looking at the current legal landscape.
The Constitution of India under Article 246 grants the power to levy taxes to the Parliament as well as the state legislatures to impose taxes. Article 265 provides that no tax can be imposed or collected without the authority of law. With the introduction of the Constitution (One Hundred and First Amendment) Act, 2016, the Parliament made several amendments concerning the imposition of Goods and Services Tax ('GST') including Article 246A, wherein exclusive power was given to the Parliament to make laws about interstate trade and commerce. Furthermore, Schedule VII lists the subject matters where Parliament and state legislatures can impose taxes.
Accordingly, any transaction involving cryptocurrency can be analyzed from two viewpoints - income and expenditure. The nature of the transaction nature and parties to the transaction would decide if it may be taxable under the Income Tax Act, 1961, or Central Goods and Services Tax Act, 2017, and other laws.
As it is well established that the regulatory framework regarding Cryptocurrencies / Bitcoin is uncertain, this article tries to analyze the taxation (or non-taxation) by considering them as both goods and currency, two major approaches currently prevalent across the world.
Global Bitcoin Situation
The bitcoin industry differs significantly from country to country.
- The United States of America considers Bitcoin to be a commodity that can be a fixed asset or an inventory asset.
- On the other hand, the UK considers it to be a ‘private currency.’
- Australia has a case-by-case approach to Bitcoins, spanning from traded products to investment, with different care for related mining or exchange facilitation services.
- Singapore considered Bitcoin to be a legal normal currency in its country,
- Japan considered Bitcoin to be commodities.
How Cryptocurrencies / Bitcoin / Bitcoin taxed in India?
The theory of Cryptocurrencies / Bitcoin being really new to the Indian economy, obviously, the government has not yet introduced the taxability of bitcoins into the books of the law. At the present time, the tax levy on bitcoins cannot be excluded out since the Indian income tax regime has always tried to tax income earned regardless of the form in how it is received.
The prospect of a tax on bitcoins can therefore be recognized in the following four situations:
Scenario 1: Income from Crypto Mining
- Crypto / Bitcoins created by mining are self-generated capital assets. Later selling of such bitcoins will, in the normal course of business, give rise to capital gains. Even then, one should note that the acquisition cost of a bitcoin can not be calculated since it is a self-generated asset. Moreover, it does not fall within the meaning of the provisions of Section 55 of the Income Tax Act, 1961, which specifically addresses the cost of acquiring such self-generated assets.
- The capital gains computation process is still not in operation following the judgment of the Supreme Court in the case of CIT v. B.C. Srinivasa Shetty (1981). The Hon’ble Supreme Court as well as various High Courts of the country had held that taxation on capital gain was not chargeable where the cost of acquisition was not ascertainable or nil. i.e No Gain in case of Nil cost of acquisition. Such issues were covered by various No of decisions Court of the country. Thus, No Capital Gain Tax will be levied on the mining of bitcoins.
- This status will be preserved until such time as the government has decided to amend Section 55 of the Act. At this point in time, given that the Indian tax systems are completely silent on the taxability of bitcoins, we thought it right to elaborate on the possibly opposite view of the income tax authorities. There is a chance that bitcoins will not be considered by the government to be capital assets at all. Consequently, the provisions on capital gains will not occur at all. Consequently, the income tax authorities can choose whether to tax the value of bitcoins obtained from mining under the head “Income from other sources”
Scenario 2: Bitcoins kept as a transfer of investment in exchange for real currency
- If bitcoins, which are capital assets, were retained as an investment and traded in exchange for actual cash, value appreciation will result in a long-term capital gain or short-term capital gain based on the holding duration of the bitcoin. In addition, long-term gains will be taxed at a flat rate of 20%, while short-term gains will be taxed at the individual slab rate. The purchase cost for the acquisition of long-term capital gains will be calculated after the indexation benefit has been awarded.
- Understanding and appreciating the likely opposite point of view of the income tax authorities referred to in paragraph 1 above, the IT authorities do not consider Bitcoins as a capital asset and thus the capital gains provisions will not apply. The income tax authorities may therefore prefer to tax the earnings from bitcoins under the heading “Income from other sources.”
- In addition, if the income is taxable under “Income from other sources,” the taxpayer will have to pay taxes at the rate applied to the tax leg from which the income is taxed. For example, if his taxable income exceeds Rs 10 lakh, he will be liable to a tax of at least 30 percent against a flat tax rate of 20 percent, which he would be responsible for paying if taxed on long-term capital gains. The advantage of indexation, as would be available if taxed on capital gains, would also not be accessible if taxed on income from other sources.
Scenario 3: Bitcoins kept as a stock-in-trade transfer in exchange for real currency
- Income from Bitcoins trading would give rise to business income and, as a consequence, income from such business would be subject to income tax as per personal slab rates.
Scenario 4: Bitcoins gained as consideration for the selling of Goods & Services
- Bitcoins obtained in this way shall be treated at the same time as receiving the money. It will represent income in the hands of the beneficiary. Moreover, since the recipient gained this income from a business or a profession, it will generally be taxed under the heading of gains or profits from a business or a profession.
- As far as the disclosure requirement for Bitcoins in the income tax return forms is concerned, there is still a lack of clarity.
SERVICES BY CA MITESH AND ASSOCIATES
- CA MITESH AND ASSOCIATES are constantly increasing their knowledge in cryptocurrency to provide better services and advisory to their clients.
- Many industries would be on the verge of disruption with the introduction of cryptocurrency, therefore there is a need to formulate the strategy in a more careful and systematic manner.
- We are continously working on the different aspects of taxation under Income Tax for any income arising from any Blockchain or cryptocurrency exchange. Thus, the Indian investors are benefitted as any investment, trade, mine, run nodes in any cryptocurrency would be easily handled and be taxed accordingly by the experts.
- In case a person is already owning or trading in Cryptocurrencies / Bitcoin, they are required to include such income or profits thereon, in their tax returns irrespective of the amount. We at CA MITESH AND ASSOCIATES are capable enough to appropriate the profits arising from crypto trading under the heads of capital gains and losses and providing with the data and forms required to file their taxes.
- All work is done or supervised by qualified CAs therefore providing utmost professional service to our clients.