Chartered Accountants Mumbai

Taxation on crypto currencies in 2020

Regulations on cryptocurrencies are different in different countries across the globe. Even the trading process is regulated differently by the financial authorities of the various countries. In India, there is very little clarity about how to deal with crypto. India is still undecided on whether crypto assets should be treated as an asset class.

After the ruling of the Supreme Court was made in the favor of cryptocurrency, India saw a boom in investment from traders and buyers who wanted to try their luck in the cryptocurrency market. This boom not only brought a number of international cryptocurrency exchanges to India but also led to the development of multiple domestic cryptocurrency exchange platforms and trade markets to cater to the Indian populace.

What are crypto-currencies?

A cryptocurrency can is a digital asset created to serve as a medium of exchange and uses cryptography to secure financial transactions.

Instead of using a centralised digital currency and central banking system cryptocurrencies maintain a decentralised control. The decentralised control of each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.

Bitcoin is considered as the first decentralised cryptocurrency; it initially released as open-source software in 2009. Since Bitcoins release, over 4,000 alternative variants of bitcoin, or other cryptocurrencies have been introduced.

Treatment of Cryptocurrency under Indian Tax Law

There is no clear rule of law in the Indian legislation that defines taxation of crypto assets; this has led to chartered accountants to interpret the taxation rules that already exist in terms of crypto assets.

Income earned by trading cryptocurrency is not considered as a normal income. It is, instead, treated as a capital gain. Typically, capital gains apply to profits earned from the sales of a moveable or immovable asset.

Essentially accountants are treating cryptocurrency as an asset much gold or real estate that can be sold for a profit rather than as a currency. So for all purposes, capital gains tax is applied on crypto related income earned by an Indian in the country.

One must keep in mind that capital gains tax rates are subject to the holding period of the asset, which implies that the period the person holds the cryptocurrency will determine the rate of taxation applicable. If the individual has an annual income of more than 10 lakh, then they will be charged a tax of 30% for short term crypto earnings and 20% for long term crypto earnings.

In case of someone who has mined their cryptocurrency, it might not be treated as a capital asset. Hence, they will not be charged a capital gains tax. The income earned from the sale of that cryptocurrency will be considered as ‘income from other sources’ and taxed accordingly.

Although, the RBI will be presenting crypto regulations as per the Supreme Courts request. Once these new regulations are notified, then the taxation of cryptocurrencies might become more explicit. Let’s wait and see what happens on that front.

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Lets take bitcoin (which is most popular) as an example and discuss various facets of cryptocurrency.

1. What is bitcoin?

Bitcoin is one of the earliest forms of cryptocurrency, forming part of the worldwide peer-to-peer payment system. 

Bitcoin was the first ever cryptocurrency created in the year 2009. Subsequently, there has been a rapid increase in the number of cryptocurrencies that have been created some of which are Litecoin, Ethereum, Zcash, Dash, Ripple etc.

Bitcoins, in India, have slowly started gaining popularity. However, one should know that bitcoins, as of today, are not centrally administered or regulated by any specific body like the RBI which administers physical currency in India. In fact, peer-to-peer transactions with bitcoins are managed using something known as the blockchain technology which serves as a public ledger for all transactions.

 

2. Where does bitcoin come from or how is it generated?

One can obtain bitcoins either by :

 

  • Mining

Mining is an activity where an individual (called the “miner”) uses his computer prowess to crack computationally difficult puzzles. The process of cracking such puzzles which are integral to the blockchain technology, help in maintaining them. As a reward for this, the miner gets new bitcoins which is nothing but creation of a bitcoin or mining.

 

  • Purchasing them from a bitcoin exchange against real currency

Everyone cannot be a bitcoin miner. Hence, you can consider buying bitcoins from bitcoin exchanges and store them in an online bitcoin wallet in digital form. Unicorn, Bitxoxo, Zebpay, Coinbase etc., are some of the bitcoin exchanges presently in India. Such bitcoins would be purchased in consideration for real currency. It would be interesting to note that currently, the value of 1 bitcoin is approximately about INR 3,61,610.

 

  • Receiving bitcoins in consideration of selling goods and services

Though this may not be a common phenomenon in India currently, there are few savvy businessmen who accept bitcoins (instead of real currency) on sale of goods or services, they deal in.

 

3. Is bitcoin legal in India?

As earlier discussed, bitcoin, as a medium of payment, has neither been authorized nor been regulated by any central authority in India. Further, no set rules, regulations or guidelines have been laid down for resolving disputes that could arise while dealing with bitcoins. Hence, bitcoin transactions come with their own set of risks. However, given this background, one cannot conclude that bitcoins are illegal as, so far, there has been no ban on bitcoins in India.

 

The Supreme Court of India has in its ruling pronounced on 25 February 2019 required the Government to come up with Cryptocurrency regulation policies. 

In March 2020, the Supreme Court (SC) struck down the Reserve Bank of India's (RBI) 2018 circular which had barred regulated banking entities from offering their services to organisations dealing in virtual currencies. The court held that the RBI circular which places a banking ban on the crypto industry is unconstitutional. 

While the judgement came as a respite for the fledgling sector that was crippled by the circular, investors continue to remain concerned about the future of the industry given how the government would seek to regulate the industry post the verdict is yet unknown. The judgement itself does not offer any guidance on regulation but simply invalidates the RBI circular on the basis that it impinges on the fundamental right of those engaged in virtual currencies-related businesses without providing adequate rationale.

 

4. How are bitcoins taxed in India?

The concept of bitcoins being quite new to the Indian market, apparently the government has not yet brought taxability of bitcoins into the statute books. At the same time, the levy of tax on bitcoins cannot be ruled out because the Indian income tax laws have always sought to tax income received irrespective of the form in which it is received.

 

Therefore, the possibility of tax on bitcoins can be looked at under the following circumstances:

 

Scenario A : Bitcoin Mining

 

Bitcoins created by mining are self-generated capital assets. Subsequent sale of such bitcoins would, in the ordinary course, give rise to capital gains. However, one may note that the cost of acquisition of a bitcoin cannot be determined as it is a self-generated asset. Furthermore, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets.

 

Therefore, the capital gains computation mechanism fails following the Supreme Court decision in the case of B.C.Srinivasa Shetty. Hence, no capital gains tax would arise on the mining of bitcoins.

 

This position would hold till such time the government thinks of coming up with an amendment to Section 55 of the Act. At this juncture, given that the Indian tax laws are silent on the taxability of bitcoins completely, we thought it right to comment on a probable contrary view by the income tax authorities. There is a possibility that the department may not consider bitcoins as capital assets at all. Hence, the provisions of capital gains would not apply at all. Accordingly, the income tax authorities may choose to tax the value of bitcoins received from mining under the head “Income from other sources”

 

Scenario B: Bitcoins held as an investment being transferred in exchange for real currency

If bitcoins, which are capital assets, have been held as an investment and are transferred in exchange for real currency, the appreciation in value would give rise to a long term capital gain or a short term capital gain depending on the period of holding of the bitcoin. Further, long term gains would be taxed at a flat rate of 20% while short term gains would be taxed at the individual slab rate. The cost of acquisition for arriving at long term capital gains will be determined after giving the benefit of indexation. A simple example is given below to understand this :
ParticularsValue in INR (Only hypothetical)
No. of bitcoins purchased0
INR equivalent of 1 bitcoin at the time of purchase2.72
Value of bitcoins (A)27.2
INR equivalent of 1 bitcoin on the date of transfer8.72
Value of bitcoins (B)87.2
Capital gains (B - A)0
Reiterating the probable contrary view of the income tax authorities discussed under Point 1 above, the IT authorities may not consider Bitcoins as a capital asset and hence the provisions of capital gains would not apply. Accordingly, the income tax authorities may choose to tax the gains from bitcoins under the head “Income from other sources”.

 

Further, if the income gets taxed under “Income from other sources”, the taxpayer would have to pay taxes at a rate as applicable to the tax slab he falls under. For eg, if his taxable income exceeds Rs 10 lakh, he would be liable to a tax @ 30% as against the flat rate of tax of 20% he would be liable to pay if charged to tax under long-term capital gains. The benefit of indexation as would be available if taxed under capital gains, would also not be available if taxed under Income from other sources.

 

Scenario C: Bitcoins held as stock-in-trade being transferred in exchange for real currency

The income arising out of bitcoins trading activity would give rise to income from business and accordingly, the profits arising out of such business would be subject to tax as per the individual slab rates.

 

Scenario D: Bitcoins being received as consideration on sale of goods and services

Bitcoins being received so shall be treated on par with receipt of money. It would constitute income in the hands of the recipient. Further, since the recipient received this income out of a business or profession, he would be taxed, normally, under the head profits or gains from business or profession.

 

As regards the disclosure requirement of bitcoins in the income tax return forms, there continues to be a lack of clarity.

 

In the budget 2018, our Finance Minister, Mr Arun Jaitley, has stated in the budget speech, “112. Distributed ledger system or the blockchain technology allows the organisation of any chain of records or transactions without the need for intermediaries. The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system. The Government will explore use of blockchain technology proactively for ushering in digital economy.”Further, the Central Bank also has chosen to reinforce its earlier message to “users, holders and traders of Virtual Currencies (“VCs”) including bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs.”

 

Therefore, considering that bitcoin transactions are gradually picking up in India, while, laws regulating them are significantly absent, we are hopeful that the government will come up with a notification soon to dispel the ambiguity around the legality of bitcoins, their taxability and disclosure requirement of bitcoins.

 

While I have covered only the taxability of Bitcoins, the tax treatment on transacting with other cryptocurrencies would also be similar to that in the case of Bitcoins.

 

Furthermore, In order to assist investors and buyers in choosing the best platform for all their cryptocurrency trades, here is a curated list of the Best Cryptocurrency exchanges in India.

 

10) Paxful

Paxful is a peer to peer marketplace that solely trades in Bitcoins. Although this might prove as a liability to Paxful and its users as many other altcoins like Ethereum and Litecoin are gaining huge popularity among the crypto community. The platform secures its user’s transactions by holding their Bitcoins in their secure escrow until the transaction is complete. The platform also has a system of trust factor that helps other traders and users identify reliable sellers on the platform. Although the platform is quite known in the Bitcoin community, it is rendered useless for investors who are looking forward to diversifying their investments in other cryptocurrencies. Paxful provides its customers with zero transaction fees for the first five transactions. After that, the platform charges a fee of $1 USD on every transaction or 1 percent of every transaction, whichever is greater, that occurs on the platform.

 

9) Unocoin

Unocoin is one of the oldest domestic cryptocurrency trading and exchange platform (created in 2013) that caters specifically to the citizens of the Indian Subcontinent. The platform was created before the Supreme Court’s decision to uplift the ban on cryptocurrency trading and hence faced a lot of flak from the Reserve Bank of India and other financial institutions shunned it too. The platform charges a fee of 0.7 percent on every transaction that is conducted on the platform. But after a minimum usage of 60 days and a significant transaction volume is detected from the user’s account, the user is automatically upgraded to ‘Gold Membership’ in which the transaction fees drop to 0.5 percent. In order to protect the investments of its members, Unocoin stores all the cryptocurrencies in multiple addresses that are connected to offline storage on a computer that is never connected to the internet. Unfortunately, the platform only trades in 3 cryptocurrencies, Bitcoin, Ethereum, and Tether. This limits the possibilities of expansion and reduces the cryptocurrency options for its users to choose from. The platform also created an app so that the users are provided with more accessibility.

8) Zebpay

Zebpay is one of the major domestic players in the field of online cryptocurrency exchanges. The platform was developed in the year 2015. The company had to close its operations after the RBI’s ban on cryptocurrency trading but soon resumed it when the Supreme Court ruled against it. Zebpay has developed a huge clientele over the years and has served almost 3 million users till now. Zebpay introduced a detailed fee structure which is divided into 3 different parts. The Maker fee at 0.15 percent is charged when the order that is placed isn’t immediately matched, The Taker fee at 0.25 percent is charged when the order is executed immediately, and the Intraday fee at 0.10 percent which is charged on every transaction that is conducted after midnight. The platform also charges a 1.75 percent commission on transactions done with net banking. The platform also provides a clutter-free and easy to use interface that can be operated easily even by greenhorn users who are new to the concept of crypto trading. The platform adheres to high levels of security measures such as storing coins in cold wallets that are air separated and located in different cities and countries. The platform also implemented firewalls and has its own security protocol system named Omnitrixx.

 

7) Giottus

Giottus is another domestic cryptocurrency that was created with an aim to provide zero downtime and high processing speed to its users. The platform is internationally recognized for its ability to handle almost 50 thousand transactions per second while guaranteeing stability even when millions of orders are placed at once. It is also one of the few platforms and possibly the only one in India that has implemented the stop-loss methodology, thus helping its users to automatically cut losses and drive up the profits whenever necessary. Despite creating an excellent platform, Giottus only trades in Bitcoin, Ethereum, Litecoin, Ripple, and Bitcoin Cash. Although these are cryptocurrency giants, it limits the potential of both the customers and the platform’s ability to grow. The platform has a decent transaction fee schedule of 0.25 percent on every buy order and 0.15 percent on every sell order.

 

6) Coinswitch

Coinswitch is renowned for having a vast array of cryptocurrencies that the platform provides its users to choose from. The platform hosts over 100 + cryptocurrencies on its platform and ensures that it is relatively easy to use so that new investors can go through the procedures with relative ease. The platform charges a transaction fee of 0.49 percent and the rates vary with the exchange medium that is selected for the transaction. The platform also released another version of their platform named Coinswitch Kuber which is comparatively user friendly and also has an app on the Android play store and the Apple store as well. The platform also provides the ability to conduct transactions using a number of fiat currencies and via credit/debit cards too.

 

5) Colodax

Colodax was created in the year 2017 by the same development team that created the platform CrypDates. The platform aims at providing its users with fast transaction speeds and trade executions. Colodax also utilizes a robust security system to keep the assets of their users safe by using cold storages and wallets that are spread all over the country. The platform is famed for providing extremely fast deposits and withdrawals on their platform by utilizing an automated monitoring platform to expedite transactions. The fee structure of the platform is quite detailed and has different transaction fees for each cryptocurrency that the platform deals with. The platform also has different fee structures according to the trading volume of the user on a 30-day basis. They also launched an app on the mobile to increase accessibility of their users.

 

4) BitBNS

BitBNS is the brainchild of a group of IIT alumni who happen to be crypto enthusiasts too. The platform was created in December 2017. The platform also hosts a peer to peer transaction capabilities and also allows users to lend or borrow their assets to increase their chances of gaining additional profit. Over the course of time, the platform introduced stop-limit orders so that users can minimize their losses while trading on the platform. The platform deals with a vast array of cryptocurrencies and hence allows its users a plethora of cryptocurrencies to choose from without changing their trading platform. BitBNS’s transaction fees vary according to the 30-day trade volume and the BNS balance that is available in the user’s wallet. The fee is structured in 11 different levels according to the aforementioned factors and the range of the fee usually ranges from 0.03 percent to 0.25 percent.

 

3) CoinDCX

CoinDCX is considered as one of the biggest players in terms of users and safety when it comes to domestic cryptocurrency exchange markets. The platform provides its users access with more than 200 cryptocurrencies on a single platform. The platform also released a number of products that are meant to assist its users with cryptocurrency trading by providing them with market leverage, price conversions, attractive interest rates on lending, and unlimited trading with a near-limitless order book. CoinDCX has a detailed fee structure that is based upon the type of cryptocurrency that is being traded and the ‘maker’ and ‘taker’ charges of the user. The platform also levies a fee when a cross-platform trade is conducted.

 

2) WazirX

WazirX is considered as an underdog champion in the field of domestic cryptocurrency exchange platforms. The platform was created in 2017 and soon gained huge popularity among investors and users. The platform conducts regular security audits to ensure the safety of its user’s investments and keep the platform safe and secure. The platform also provides its users with a peer to peer transaction ability and maintains a system that is capable of handling millions of transactions and can scale up the infrastructure to meet the rising demands. The fee structure of is minimum and is usually between 0.1 percent to 0.2 percent. WazirX is also available on 5 different platforms, thus ensuring that users on every domain are capable of accessing their exchange.

 

1) BuyUcoin

BuyUCoin is the brainchild of Atulya Bhatt, Shivam Thakral, and Devesh Aggarwal and came to existence in June 2016. The platform quickly became an industry leader in the field of domestic cryptocurrency exchange markets and soon amassed a huge community of investors and crypto enthusiasts. The platform was one of the first crypto exchanges that introduced the peer to peer transaction model and provides its users with multiple cryptocurrencies to choose and trade with. The platform is specifically created to ensure ease of use for both experienced investors as well as interested users who are new to the concept of crypto trading. BuyUCoin charges a 0 percent fee for their OTC desk while the transaction fees vary according to the cryptocurrency that is being traded. Another notable feature of the platform is that it doesn’t charge any money for INR withdrawal from the user’s wallet. Since its inception, the platform has conducted $50 million USD worth of trade and supports more than 30 cryptocurrencies with more on the way to being inducted into the platform.