Disclose Crypto assets and income in tax returns OR face penal action Black Money has always been a point of concern for India and the government has been trying to deal with it for ages. Recognising the limitations under the existing legislations, the government enacted…
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- Reserve Bank of India has requested its own controlled entities (such as banks) to avoid offering services to individuals or business entities engaged in cash cryptocurrencies (INRs) up and down routes. This restricts the purchase/selling of INR cryptocurrencies via banks. Despite all the weaknesses, India represents one of the largest nations in the world, taking into account the share of currency kept (though not actually traded), which is 44% of the world’s share. Given the uncertainty surrounding Bitcoin and the fairly developing state of its growth, one thing is for sure-Bitcoin will take time to be widely accepted as a currency or a medium of payment in India.
- This will contribute to the usual reaction of this ex-change shifting base outside India, and the subsequent loss of big potential tax revenues. The handling of bitcoins would be perfect if the government were to legalize the trade of these currencies. Currencies should be viewed as current assets, and GST should be paid at the margins that bitcoin exchanges charge their users. This would ensure that currency trade is limited, as well as the addition of tax Income to the government of India.
- In the Budget Speech of Finance Minister, Mr. Arun Jaitley, said in his 2018 budget, He said that “Blockchain technology or Distributed ledger system enables the Firms of any chain of records or transactions without the need for intermediaries. The Govt of India does not consider cryptocurrencies to be a coin or legal tender and will take all steps to eliminate the usage of such crypto assets in the funding of illegal activities or as part of the payment system.
- The Centre Govt will possibly explore the use of blockchain technology to usher in the digital economy.” Further, the RBI has also chosen to reiterate its earlier message to ‘users, holders and traders of Virtual Currency (‘VCs’)/ CryptoCurrencies like bitcoins regarding financial, operational, legal, potentially global, consumer protection and security risks associated with dealing with such risks.
- Although this article is aimed at addressing the taxability of Bitcoins only, the tax treatment of transactions with other cryptocurrencies will also be similar to that of cryptocurrencies /Bitcoins.
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.
What are the different situations/ Scenario of CryptoCurrencies taxed in India?
The theory of CryptoCurrencies 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:
Situation 1: Income from Bitcoin Mining
- 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”
Situation 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.
Situation 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.
Situation 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.
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