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How Coin hard forks taxed India? 2021

This article focusses on How Coin hard forks taxed India? 2021

Let's first understand what is Coin hard forks and how it could be taxed in India?

What is Coin hard forks?

A hard fork occurs when there is a split in a cryptocurrency’s blockchain. Bitcoin had a hard fork in its blockchain on August 1, 2017, dividing into two separate coins: Bitcoin and Bitcoin Cash. Each holder of a Bitcoin unit was entitled to one Bitcoin Cash unit. Similarly, Litecoin, the fifth-largest cryptocurrency, had a hard fork—Litecoin Cash—in February 2018.

Even the IRS is US has not provided guidance on hard fork transactions, let alone Income Tax Department in India. Many Crypto Tax experts and Cryptocurrency traders are still debating its tax treatment. Common questions include: Is a hard fork the same as a stock split? If so, does the value of the coins have to be divided between the original coin and the fork, or is it a taxable dividend?

Compounding this issue is the fact that coin holders might not be able to sell the new fork currency immediately. The cryptocurrency exchange Coinbase, for example, did not support Bitcoin Cash when it originally forked in August 2017, but it did add it to accounts for rightful holders later that year. Is it therefore acceptable to defer income on the fork transaction until the coin holder obtains such access, or later sells the new, forked coins? It seems reasonable to assume that coin traders should not have to report taxable income on a hard fork until the new coin is time-stamped as a ledger entry in the blockchain.

How Coin hard forks could be taxed in India?

Bitcoin / Cryptocurrency are not illegal in India but, they are not regulated. This means that you can buy and sell Bitcoin, even hold it as an investment but, there is no governing body to look after or protect it. There is a lot of confusion in India right now because there are no regulations in the country yet.

Neither the Income Tax Act, 1961, nor the Central Board of Direct Taxes stipulates any specific tax treatment for income earned from investments in cryptocurrencies. Under the Act, income earned from the sale of cryptocurrency can be taxed either as income from capital gains, or as profits/gains from business or profession. The classification of income and its computation mechanism are determined by whether an individual holds cryptocurrency as an investment or stock-in-trade.

Given the above scenario wherein there is no regulation or taxation rules defined for computation of Gains from cryptocurrencies, one cannot make a declarative statements.

We can look at the treatment in Income tax for another capital asset such as Stock. Considering from the investor’s point of view, a stock or share split (share sub-division, to give it its proper legal name) is quite similar. If you are holding 100 shares of a company with a face value of  10 each and the company decides to split the shares into a face value of  5 each, after the split, you would be holding 200 shares of  5 each instead of 100 shares with a face value of  10 each. Here, too, normally the market price would adjust for the split and the overall value of your total holding would remain in the same range.

In fact, in some countries where shares have no face value, there is really no difference between a bonus issue and a stock split as it is just an increase in the number of shares. When it comes to taxation in India, the two transactions are treated quite differently. Of course, there is no tax at the time of the actual bonus issue or the actual share sub-division. When it comes to sale of shares, the difference in tax treatment clearly comes to light. 

The tax position for sub-divided or split shares is that all shares are regarded as having been acquired when the original shares were acquired and the cost of the split shares is to be taken proportionate to the cost of the original shares. Unlike bonus shares, which are regarded as new shares separate from the original shares, the split shares are regarded as identical to the original shares, but with proportionate cost adjustment. Therefore, if you have held the original shares for at least 12 months, but sell the split shares within a few days of the stock split, the gains that you make would still be regarded as long term and would qualify for tax exemption.

If one were to take similiar approach towards Coin hard forks then if you have held the original coins for less then 12 months, and sell the forked coins within a few days of the Coin hard fork, the gains that you make would also be regarded as short term and taxed as per your income slab.