INTRODUCTION
Cryptocurrency is a type of decentralized digital money based on blockchain technology. At present, there are more than 5000 cryptocurrencies being circulated including the Bitcoins, Ethereum, Litecoin, Ripple, etc. The trending cryptocurrency trading has also seen a further demand in investment in other digital assets primarily the Non-Fungible Tokens (NFTs). The NFTs are digital tokens of ownership of any picture, document, audio, etc. which are transferred through a Distributed Ledger Technology.
The market of cryptocurrency exchange and NFTs is growing rapidly attracting a large number of investors. But with new changes come new risks and the Government is correct in showing concerns over this new digital asset market. This concern of the Government was evident when the Reserve bank of India (RBI) through Circular No. RBI/2017-18/154 dated 06.04.2018 (the Circular) prohibiting banks and other financial institutions from facilitating cryptocurrency transactions.
This created uproar amongst the cryptocurrency enthusiasts and a writ petition was filed in the Supreme Court. In March 2020, the Supreme Court decided in favour of the investors while removing the ban imposed vide the Circular. [Internet and Mobile Association of India v. Reserve Bank of India (Writ Petition (Civil) No. 528 of 2018)].
The Government constantly faces a tussle between enabling an attractive liberal tax policy for the investors and maintaining the revenue generation from the taxes. The policies are thus framed in a way to balance the two objectives and fetch maximum output. The Government also uses the tax policy as a tool to encourage or discourage the trade and investment in a particular area of goods or services. In India, the high amount of taxes on sin goods is a prime example in this regard.
However, the position is still unclear as to whether or not cryptocurrency will survive the Indian market amidst the strong opposition from the Government of India. Proposals have been made to launch Central Bank Digital Currency (CBDCs) and the recent launch of E-RUPI vouchers is a step towards achieving this goal.
It is pertinent to note that the Government intends to legalize and do away with all the ambiguity pertaining to Cryptocurrency. Recently, addressing the concern of tax avoidance in the digital world, India along with Organisation for Economic Co-operation and Development (OECD), countries have signed a statement which has put a global minimum tax on all the multi-national corporations where they are located. This is likely to include in its ambit the multinational cryptocurrency exchanges as well.
All in all, there have been major developments and decisions made by the Government in the recent past on trying to find control and regulation of these quickly expanding digital asset market.
CRYPTOCURRENCY: ASSET OR CURRENCY?
The Financial Action Task Force Report defined ‘Cryptocurrency’ to mean a math-based, decentralized convertible virtual currency protected by cryptography by relying on public and private keys to transfer value from one person to another and signed cryptographically each time it is transferred.
The question regarding whether Cryptocurrency is considered as asset or currency has been in discussion since a long time.
A Currency means money in whatever form used as a medium of exchange and function as a legal tender in a particular jurisdiction whereas an Asset is a form of resource owned by an individual, a corporation or a company which tenders economic value in present or future. Cryptocurrency is also a resource having an economic value and the Government has not yet recognized Cryptocurrency as a means of exchange. Therefore, Cryptocurrency is likely to be treated as an asset.
There can be two situations- either cryptocurrency can be treated as a financial asset and in that scenario the authority would be the RBI while if it is considered as a tradable asset then Securities and Exchange Board of India (SEBI) will have a role to play. Once the legislation on Cryptocurrency is finalized, it would pave a way for regulating the Cryptocurrency and its trading.
TAXABILITY OF CRYPTOCURRENCY IN INDIA
Tax policy is a quintessential aspect of formulating a lucrative trade and investment policy of any country. Most of the trade and investment decisions of businesses are based on the tax regime of the location. The Indian Tax Regime consists of two types of taxes- Direct Tax and Indirect Tax.
Currently, there is still ambiguity with respect to the rules and regulations pertaining to Cryptocurrency. In absence of a special law, taxation of Cryptocurrency is principally governed by the Act.
Under the Act, Cryptocurrency can be taxed under the purview of ‘Income from Capital Gains’ or ‘Profits and Gains of Business and Profession’; depending upon the nature of investment.
1. Income from Capital Gains
Capital assets have been defined under Sec 2(14) of the Act as “property of any kind held by the assessee whether or not connected with his business or profession”. The Act lays down a wider definition of the term ‘capital asset’ covering all kinds of property except those which are expressly excluded under the Act.
Therefore, Cryptocurrency would be considered as capital asset if it has been purchased as an investment. Any gains arising out of the transfer of such Cryptocurrency must be considered as Capital Gains and bound to be taxed in accordance with Section 45 of the Act.
Income from capital gains can be classified as “Short Term Capital Gains (STCG)” and “Long- Term Capital Gains (LTCG)”. Capital Assets which are held for more than 36 months or 24 months or 12 months, as the case may be; immediately preceding the date of transfer is treated as long-term capital asset.
Hence, it can be inferred that if Cryptocurrency is treated as a tradeable asset, the gains from Cryptocurrency would be classified as LTCG if the said Cryptocurrency is held for more than 12 months. In case if cryptocurrency is treated as a financial asset, it would be classified as LTCG if the said Cryptocurrency is held for more than 36 months.
When the gains from Cryptocurrency are classified as LTCG, the same would be taxed at 20% plus applicable cess and surcharge post indexation.
The gains made from selling the Cryptocurrency before 12 months (in case the Cryptocurrency is treated as Tradeable Asset) and before 36 months (in case the Cryptocurrency is treated as Financial Asset); would be treated as STCG.
When the gains from Cryptocurrency are classified as STCG, the same would be taxed at 15% plus applicable cess and surcharge.
2. Profits and Gains of Business and Profession
Cryptocurrency is taxed as business income if it is traded frequently. When Cryptocurrency is treated as a stock, levying taxation on it is not difficult in comparison to situation when it is treated as capital gain.
“Business” is defined under Section 2(13) of the Act as “trade, commerce or manufacture or any adventure or concern of such nature”. Therefore, any continuous trading activity in Cryptocurrencies is covered under this definition, and therefore, profits earned are taxable under Section 28 of the Act.
The profits realized from Cryptocurrency under business activity are not mandatorily required to be in the form of money. They could be taxed even if they are ‘in-kind’. Any cost incurred for this purpose, such as buying of computing power as a capital asset, should be deductible as specified under Section 30 to Section 43D of the Act.
MODES OF INCOME FROM CRYPTOCURRENCY AND TAX LEVIED
1. Mining
Cryptocurrency created by mining can be considered as self-generated capital assets which would be taxed as either LTCG or STCG depending upon the period for which the said Cryptocurrency was held.
2. Transferred in Exchange for Real Currency
Cryptocurrency can be converted in to cash by exchange. The same would be taxed as either LTCG or STCG depending upon the period for which the said Cryptocurrency was held.
3. Income from Trading Activity
The income from trading Cryptocurrency would come under the purview of Business and hence the profit arising from such trading would be taxed accordingly.
4. Received on Sale of Goods and Services
The income received on sale of goods and services from cryptocurrency gains can be treated like receipt of money. Therefore, it would be taxed under profits or gains from Business/Profession.
AMLEGALS REMARKS
In a digitized world, there is a very little scope to avoid the new digital innovations. For an economy to flourish, steps must be taken in order to adapt to these new avenues rather than putting bold restrictions. As of now, cryptocurrency remains a grey area for Indian people investing/ trading in Cryptocurrency. Steps must thus be taken to regulate this new market.
The Government is set to table the bill on regulation of Cryptocurrency which is expected to bring significant revolutions in the Cryptocurrency market. The introduction of the upcoming Bill on Cryptocurrency will set a clearer picture on the future of digital assets in India. The Bill will make clear the as to what all shall be included under digital asset, what transactions be legally protected and how is the trading in these digital assets be taxed.
-Team AMLEGALS, assisted by Ms. Labdhi Mehta (Intern)
For any queries or feedback, feel free to get in touch with chaitali.sadayet@amlegals.com or aditi.tiwari@amlegals.com.
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