People from all around the world are interested in cryptocurrency. It is essential to understand all its aspects and how cryptocurrencies can attract tax. Authorities worldwide are working on designing a standard set of rules of taxation of cryptocurrencies.
In India, the Reserve Bank of India (RBI) had banned banks and other financial institutions from facilitating cryptocurrency transactions in 2018. Supreme Court reversed the order in the year 2020. Since then, the trading of virtual coins has been allowed, but a legal tender status is yet to be granted. Legal tender is a legally recognised payment instrument used to fulfil a financial commitment. It can also be said as an economic method accepted by the country’s legal system.
For example, Rupee is a legal tender accepted by India. However, no one can escape from paying tax on cryptocurrency trades.
It is crucial to know about taxation around cryptocurrency if individual plans to invest in digital assets. Cryptocurrencies- such as Bitcoins, Ethereum etc.- are a form of digitalised money that is decentralised. They function on blockchain technology connected to a network of computers. Blockchain is a system of recording information that makes it difficult or impossible to change, hack, or cheat the system.
Indian Income Tax Act 1961 does not set any specific guidelines on cryptocurrency taxation. Still, the country’s taxpayers need to report transactions if they have invested in cryptocurrencies and have profited from those investments.
Minister of Finance, Mr Anurag Singh Thakur, stated that the gains resulting from the transfer of cryptocurrencies are subjected to tax under the head of income, depending upon the nature of holding the same.
If an individual holds a cryptocurrency for more than 36 months, its profits will be categorised as long-term capital gains. Still, if it is held for a shorter period, its profits will be considered a short-term capital gain. The long-term capital gains are taxable at the rate of 20 per cent, and all the other gains are subjected to tax at the applicable personal taxation rates.
If cryptocurrency transactions are carried out more often, the profit from such transactions would be taxable as a business income. If cryptocurrencies are held as ‘stock-in-trade’, their income will also be subjected to tax.
While dealing with cryptocurrency, the tax must be paid if it generates income; the record must be maintained of all the transactions.
Crypto mining is how new units of digital currency are created. Currency generated by mining is a self-generated capital asset and is subjected to be taxed as a capital gain. But a section of the Income Tax Act 1961, which deals with the cost of acquisition and improvement, does not recognise it. However, as per a few online sources, cryptocurrency mining can be considered taxable. The fair market value or cost basis of the coin is the price when it was mined (created).
The Indian government is planning to categorise virtual currencies and their taxation based on their use, such as payments, investments, or utility. Trading in cryptocurrency may be included in a formal taxation structure. The Ministry of Finance has reportedly formed a committee to analyse if the income made by crypto-trading can be taxed. There is no clarification on taxation, considering cryptocurrencies as an asset, and it will be clearer once a crypto law is introduced.
While it’s not yet clear that the Indian government will set a regulatory framework for virtual assets, it has provided some transparency provisions. The Indian government made it mandatory for companies dealing with virtual currencies to disclose profit or loss by crypto transactions and the amount of cryptocurrency they hold in their balance sheets. The amendments made in the Companies Act came into effect on April 1, 2021.
Many countries already have taxation laws for cryptocurrency gains, but India’s cold response to the virtual currency ecosystem makes it tough for investors to file their tax returns. As cryptocurrency regulations in India remain uncertain, a growing number of Indians are accessing digital currencies by buying and selling on foreign platforms, which may have better features and customer service.
The country’s first cryptocurrency legislation was likely to be presented during the 2021 winter session of the Parliament. The Cryptocurrency and Regulation of Official Digital Currency Bill is expected to contain disclosure requirements for income tax returns for crypto assets in India and foreign crypto exchanges by Indian residents.
This may allow the government to regulate cryptocurrency transactions and make cryptocurrency legal, giving investors more confidence to invest in the sector. It is believed that cryptocurrency will generate tax revenues for the Indian government.
Currently, there is no regulation or ban on cryptocurrencies in the country. But the regulation on cryptocurrencies might allow the continuation of Crypto trading. Investors will be allowed to buy and sell cryptocurrencies from exchange platforms that follow certain guidelines.
India’s approach towards cryptocurrencies seems to be ‘protective’. Any measure included in the crypto bill is likely to ensure that investors’ money is protected.
Multiple signs suggest that crypto will be classified as an asset class rather than a currency. This means people will invest and grow their money in crypto.
The government may start levying taxes on cryptocurrencies. The new bill may provide better clarity on how the government plans to tax cryptocurrencies. It is believed that the government is exploring ways to generate revenue from cryptocurrencies.
The Reserve Bank of India’s (RBI) order banning banks from supporting crypto transactions was reversed by the Supreme Court order of March 2020.
Since 2013, various warnings have been issued by the RBI through its press releases regarding the risks of using cryptocurrencies in the country’s financial system. On February 28, 2019, the Inter-ministerial Committee also released a report recommending certain measures concerning cryptocurrencies, including a complete ban on private cryptocurrencies. This committee had also prepared a draft bill known as Crypto Token and Crypto Asset (Banning, Control, and Regulation) Bill, 2018. However, the use of cryptocurrency was never banned.
In April 2018, the RBI banned regulated-financial institutions from providing services to businesses trading cryptocurrencies, which put the entire Indian cryptocurrency trading industry in question. The validity of the circular was challenged before the Supreme Court in various writ petitions led by crypto-trading entities. In Internet and Mobile Association of India v. Reserve Bank of India, the Supreme Court deliberated on cryptocurrency and struck down the circular.
