Summary: The Finance Act, 2022 introduced a 30% tax on income from cryptocurrencies in India, signaling the government’s effort to regulate this digital asset class without granting it legal tender status. Cryptocurrencies are classified as either “currency” or “assets” for taxation, with profits taxed as business income or capital gains. Challenges persist due to the anonymous, decentralized nature of crypto transactions, valuation issues, and the inability to offset losses or carry them forward. The tax framework is viewed as burdensome for investors, with high compliance costs and a flat tax rate irrespective of holding periods. Comparisons with global practices highlight the need for a comprehensive policy addressing crypto taxation, promoting long-term investment, and facilitating regulatory clarity. Despite criticism, the tax regime legitimizes the industry, ensures investor protection, and positions India for potential growth in the global crypto ecosystem. To thrive, investors must adopt robust bookkeeping and strategic trading practices, while education and streamlined compliance tools remain critical for widespread adoption.
Abstract
This Article covers the aspect of taxation regime for cryptocurrency in the light of the widespread use and tensions arising because of lack of regulations for the same. Recently, cryptocurrencies have started to draw the attention of the taxation authorities due to their high trading prices on exchanges not only across the world but also in India for instance the Union Budget of 2022 covers the cryptocurrency for the taxation purpose. There is no doubt that it is difficult to trace the origin of cryptocurrency as it is peer to peer transaction instead of being government issued currency. The transactions concerning the cryptocurrencies can be examined from two set of scenarios – expenditure and income, it is the nature of the parties and the transaction which decide if the same is taxable under the Central Goods or Services Act, 2017 or the Income Tax Act, 1961. Therefore, in this article, we have analysed the Union Budget of 2022 and the direct and indirect taxation of cryptocurrency. We have compared the legal position in different jurisdiction for the purpose of analysis and concluded with our own remarks on the Union Budget of 2022.
I. Introduction
A. The Background
The Finance Act, 2022 [hereinafter “the Act”] was recently introduced with the objective of taxing Virtual Digital Assets, of which cryptocurrency is an established subset. With multiple countries across the world choosing to either regulate or ban the exchange in cryptocurrency, the global system is witnessing the creation of a spectrum of regulations. As a result, it becomes pertinent to comprehensively assess the scheme of taxation in India and its implications on the market. Since cryptocurrency does not possess a cemented legal status in India, it is intriguing to deconstruct how it is to be taxed notwithstanding its lack of such status.
The Act is a crucial legislative measure that has brought several changes in the taxation regime of India. One of the significant changes in the Act, is the taxation of cryptocurrency. The Finance Minister introduced a 30% income tax on returns from digital currencies.[1] This 30% tax on cryptocurrency income has evoked mixed reactions from Indians. Some opine that the rate of 30% on cryptocurrency implies that the government puts it at par with betting and speculation. Some are relieved that at least a framework to tax cryptocurrency has been put in place. But to most, a 30% tax was the easier choice between two evils —the other being an outright ban.[2] In this context, it is pertinent or understand the concept of cryptocurrency and Indian Taxation framework for the same.
B. Understanding Cryptocurrencies
Cryptocurrencies are one of the products of the digital era which has created new possibilities. Cryptocurrency is “a digital representation of value that:
(i) is intended to constitute a peer-to-peer (P2P) alternative to government-issued legal tender;
(ii) is used as a general-purpose medium of exchange (independent of any central bank);
(iii) is secured by a mechanism known as cryptography, and
(iv) can be converted into legal tender and vice versa.”[3]
Similar to a computer file, cryptocurrency consist of data and are generated as a result of a process called mining. In the mining process, a special software is utilized for the mining of cryptocurrencies.[4] After extraction, the cryptocurrency can be used for trading all over the world, by block chain using a peer-to-peer transaction which provides anonymity and thus has the capacity to become a parallel economy. The total value of all these digital currencies has swelled to about $2 trillion.[5] Of these, Bitcoin is the most popular, worth more than $800 billion itself.[6] Cryptocurrency’s rapid appreciation has many investors questioning the place of stocks in their portfolios. But there are numerous differences between stocks and cryptocurrencies. The most important is that a stock is an ownership interest in a business (backed by the company’s assets and cash flow), whereas cryptocurrency in most cases is not backed by anything at all, due to its decentralized nature.
C. The issues with augment of Crypto
Cryptocurrencies have resulted in the rise of money laundering as the several nations are finding it extremely difficult to trace the unaccountable money or proceeds of crime. It is precisely because of this reason that cryptocurrency is not yet recognized as a legal tender in many nations.[7]
Due to the cross-border trading and investment via cryptocurrencies, the national regulators can no longer ignore it. It is fait accompli that the illegal nature of income does not affect the taxation of such income at all. Indian regulators have not yet recognised cryptocurrencies and have asked people to not deal with them.[8] On April 5, 2018, RBI issued a press release stating that virtual currencies (VCs), referred to as cryptocurrencies and crypto assets, raise concerns of consumer protection, market integrity, and money laundering. The Supreme Court ended this ban on banks from dealing in virtual currencies such as cryptocurrencies including bitcoins. Thereby, the position in India regarding the legality of cryptocurrency remains unsettled.
In fact, the bitcoin is recognized as a legal tender in many developing countries but there are other countries such as Vietnam where the bitcoin is neither explicitly legal nor illegal but there is a banking ban placed on it.[9] The need of the hour for India is to come up with clear laws to reinstate its position in the global fora.
In this context, we will in this paper analyse and examine the treatment of cryptocurrencies under the current taxation regime and compare the same with taxation regime of other countries. This paper is divided in four sections – first section deals with taxation of cryptocurrency under the regime of direct tax, second section dealing with taxation of cryptocurrencies under the regime of indirect tax, third section examining the latest practices in various nations and fourth section concludes the entire discussion. In analysing the new scheme of taxation, this paper seeks to argue that it acts as a temporary mechanism that fails to adequately account for market realities and imposes high costs of compliance, thereby restricting the very use of cryptocurrencies for exchange.
II. Legal Status of Cryptocurrencies and Taxation
A. Position in India – The View Taken by Judiciary
The Indian legal space has been riddled with constant uncertainty surrounding the legal status of cryptocurrencies. The case of Internet and Mobile Association of India v RBI,[10] dealt with the validity of a Circular by the Reserve Bank of India (‘RBI’) that sought to restrict business relationships with cryptocurrency entities. In deciding on the same, the Supreme Court (‘Court’) was faced with the question of whether Virtual Currencies constituted legal tender. However, although the Court had the opportunity to clarify the position and demarcate the legal status of Virtual Currencies including cryptocurrency, it chose to take an ambivalent view. It was noted that although Virtual Currencies were not directly relatable to legal tender or fiat money, they could function as currency under specific circumstances. However, it was also noted that cryptocurrency could act as property under certain circumstances as well. [11] This recent judgment provided the Court with the opportunity to clarify the final position of all Virtual Currencies in India. However, the ambiguity that prevailed before the case was simply perpetuated by the Court’s multifaceted view.
Further, in the case of B.R. Films v. Income Tax Officer, the Delhi High Court held that gains made from the sale of Bitcoin were taxable under the Income Tax Act. The court stated that Bitcoin is an asset and that any gains made from its sale are subject to taxation. Similarly in B.R. Nagarajan v. Income, the Supreme Court held that gains from the sale of cryptocurrency were taxable as income under the Income Tax Act, 1961. The court also held that the income tax authorities were entitled to seek information from cryptocurrency exchanges about their users’ transactions.[12]
Moreover, in Rashmi Deshpande v. Union of India, the Bombay High Court held that cryptocurrency transactions were not illegal under Indian law and that the income generated from them was taxable. The court directed the income tax authorities to treat income from cryptocurrency transactions as income from other sources.[13] The Court then, in Koinex Solutions Pvt. Ltd. v. Union of India, directed the Reserve Bank of India to disclose whether it had conducted any research or consultation before issuing the circular that prohibited banks from dealing with cryptocurrency businesses. The court also directed the government to clarify its stance on the regulation of cryptocurrencies in India.[14]
B. Attempts to bring Legislative Reform
As a result of the aforementioned lack of clarity in India, the taxation of cryptocurrencies has been unchartered territory till the introduction of the Finance Act, 2022 (‘2022 Amendments’) that amends the Income Tax Act, 1961. Before the introduction of the 2022 Amendments, the uncertainty surrounding the legal status of cryptocurrency has been reflected in broader uncertainty surrounding how it might have been taxed.
While there previously existed no specific provision mandating crypto gains to be taxed, there have been various provisions that such gains could have been taxed under. For instance, if cryptocurrency was treated as ‘goods’ under the Central Goods and Services Act, 2017, it would have been liable to taxation under the scheme therein. Contrarily, the Income Tax Act, 1961, defines ‘income’ to include any gain that is derived from land, capital or labour.[15] The gaining of profit through the exchange of cryptocurrency could be interpreted within this provision as well. Ascribing a specific legal status could have possibly clarified the scheme under which cryptocurrency would have been taxed in the earlier regime. However, a lack of clarity regarding the same and the Government’s public disapproval[16] against the commercial use of cryptocurrency has left multiple legal and regulatory regimes unexplored. This has further blurred the position of cryptocurrency and the schemes that cover it. Therefore, the very question of whether profits gained through cryptocurrency are taxable was left unanswered. However, this dilemma has been addressed to a certain extent in the 2022 Amendments to the Income Tax Act.
C. The 2022 Amendments and their Implications
1. The reforms proposed
The Union Budget of 2022 has provided some clarity on taxation of cryptocurrencies and other virtual assets. The some of the taxation regulations proposed relating to the cryptocurrency are:[17]
(i) The Finance Bill, 2022 defines “virtual digital asset” as any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value stored or traded electronically;
(ii) 30 percent tax on the income from transactions in digital currency;
(iii) One percent TDS (Tax deducted at Source) on transactions in such asset classes above a certain threshold. This is to bring such asset under the tax net;
(iv) No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Losses from transfer of digital assets can’t be set off against any other income;
(v) Gifts in crypto and digital assets will also be taxed; and
(vi) The Reserve Bank of India will launch its digital currency in the year starting April 1, 2022.
2. Virtual Digital Assets
The definition of “Virtual Digital Asset” (‘VDA’) is included in clause (47A) of Section 2 of the Act, which was added by the Finance Act of 2022. The suggested definition seems to be rather broad in scope. It places emphasis on some essential characteristics of a VDA, such as its nature as information, a code, a number, or a token that was created using cryptographic techniques or another method; its digital representation of value that is traded with or without payment; and its transferability, storage, or electronic tradability. The VDA, as described above, also possesses important characteristics of “money,” like being a store of value, a unit of account, and having intrinsic worth. Nevertheless, neither “distributed ledger technology” nor “blockchain” are included in the proposed definition of VDA. Thus, essentially the new definition implies cryptocurrency is to be a digital representation of value that is not backed by any government or central authority, however may yet be used as a medium of exchange, store of value or unit of account.
3. Analysis and understanding implications
However, although the provisions provide clarity on the primal question of whether cryptocurrency is to be taxed in India, they fail to comprehensively cement a holistic scheme. This failure starts at the very definition of the term ‘Virtual Digital Assets’. At present, the definition is wide enough to include any code or information generated through cryptographic means that possesses an ‘inherent value’. However, the very nature and composition of this ‘inherent value’ has not been defined, and therefore leaves room for multiple interpretations and resultant uncertainty.
If the Legislature intended to include all virtual assets within the definition of VDA, this would be a significant cost on the very use of virtual assets that may possess any value. This burden of discerning the scheme and scope of taxation falls on the taxpayer in multiple other situations as well. For instance, when consideration is paid for the transfer of VDA, the person paying the consideration is required to ensure that the taxable amount from the consideration is duly paid. However, if the consideration itself is a VDA such as cryptocurrency, it requires to be first converted into cash before it is deducted as a taxable amount under provisions such as the newly added S. 194S of the Income Tax Act. This raises new concerns since neither the Income Tax Act nor the 2022 Amendments provide any guidance regarding the method of valuation of different VDAs, including cryptocurrency. Since the burden is on the taxpayer to unravel the definitional and structural ambiguities, the cost of compliance is extremely high.
Even if we were to disregard the costs that may be imposed by the lack of definitional and conceptual clarity, the tax level of 30% itself has been criticised to be disproportionate and burdensome since it is higher than other capital gains tax levels for assets, and is akin to the tax rate imposed on unfavourable activities such as gambling.[18] Popular mechanisms in the field of cryptocurrencies, such as mining, have not been included within the scope of costs of acquisition.[19] This further imposes the taxable costs on cryptocurrency trade and exchange since no value is attached to the process of actually acquiring it.
A culmination of these effects indicates that there are multiple indirect costs attached to engaging in cryptocurrency exchange in India. This would then subsequently deem the activity to be extremely cumbersome and inefficient. The effect may be intentional owing to the Government’s public scepticism against the use of cryptocurrencies in formal settings. However, this does not take away from the restrictive effects of the new regime. Multiple investors may now consider moving to other jurisdictions with lighter taxation regimes, or at least those that have a lower cost of compliance.
III. Taxation of Cryptocurrency Under Direct Tax
The legal status of cryptocurrency is pivotal to the position it occupies within a jurisdiction’s regulatory scheme. It is pertinent to note that multiple jurisdictions have chosen to allocate a specific legal status to cryptocurrency, to streamline its position within the legal sphere. This is particularly concerning taxation since tax schemes vary depending on the nature of the subject. For instance, in Norway, Finland and Germany, cryptocurrencies are treated as capital gains and are therefore taxed on wealth taxes.[20] In Austria, however, they are viewed as intangible assets and are taxed accordingly.[21] The status accorded to cyrptocurrencies is therefore pivotal to the scheme of taxation it is subject to.
In India, the Income Tax Act, 1961 [“the ITA”] governs the taxation of cryptocurrencies under the direct tax regime in India. To devise a direct taxation framework for cryptocurrency, the first issue that comes to the fore is that of classification of cryptocurrency. There are two points of views with respect to treatment of cryptocurrency for the purposes of taxation – cryptocurrency can either be regarded as currency or as an asset.
A. Is crypto a ‘currency’ or an ‘asset’?
The taxation on cryptocurrencies should depend on the nature of investment, whether it is held in the form of currency or in the form of assets. Under the Income Tax Act, “currency” is defined to include “currency notes, postal notes, postal orders, money orders, cheques, drafts, traveller’s cheque, letter of credit, bill of exchange and promissory notes, credit cards and other such similar instruments as notified by the RBI.”[22] If cryptocurrencies were to be considered as currencies they would fall outside the scope of taxation under the Act as section 2(24) of the Act defines income in an inclusive so as to include an item in the provision, neither of which includes currency or money as income.[23] Also, as it is regarded as a mode of payment, the tax is levied not on the currency but on the transaction.[24]
It is important to note that the Reserve Bank of India (RBI) has not yet granted legal tender status to cryptocurrencies. However, investments in cryptocurrency and transactions related to cryptocurrency would still be subject to tax. Therefore, at present gains and profits are being taxed under various heads, depending on the nature of the transaction.
The other categorisation of cryptocurrency (besides currency) can be in the form of assets. If cryptocurrencies are regarded as assets, i.e., as goods or property, then taxation would be on ‘capital gains’ (for property) or ‘profit and gains from business and profession’ (for goods). Under such classification, profits from the sale of cryptocurrency can be taxed as business income if traded frequently, or as capital gains if held for investment purposes.[25] However, it needs to be noted that, if considered as business income, then the profit can be taxed as per the applicable income tax slab rates, but if it is held for investment purpose, then taxation can be the same as tax gain in the form of capital gains. These subheads below will analyse these two situations.
1. Taxation under Capital gains
Capital asset is defined under Section 2(14) of the Income Tax Act, 1961 (‘the Act’) as “property of any kind held by the assessee whether or not connected with his business or profession”.[26] This definition excludes the personal effects of the assessee, i.e., any movable property held by the assessee (or any dependent family member) for his personal use.[27] The definition has a very wide scope and covers all types of property except the excluded ones.[28] Therefore, any gains which are received as a result of transfer of cryptocurrencies must be classified as capital gains.[29] In case the period during which the cryptocurrency is held is greater than 36 months, while transferring, then it would be considered as long term capital asset and consequently will be considered for taxation as per section 112 of the Income Tax Act.[30] On the contrary, in case the period during which the cryptocurrency is held is not more than 36 months, then the tax rate is calculated as per the provisions governing short term capital gains.[31] In the latter situation, the cost at which the cryptocurrency is acquired would be its market value of the cryptocurrency at the time of its creation, and consequently any surplus which is earned over and above this cost will be liable for taxation under section 45 of the Act.[32]
Prima facie the treatment mentioned above seems reasonable but there are some discrepancies in its execution. The basis of taxation as capital gains is built on the assumption the cost of acquisition can be ascertained. However, pragmatically it is very difficult to determine cost of acquisition as it is derived via mining.[33] Practically it is very difficult to determine the only input which is received from the miner is the capacity of the computer.[34]
In India, the position is now well established on the issue of taxation under capital gains in those scenarios where the cost of acquisition cannot be ascertained. In the landmark Supreme Court case of CIT v. B.C. Srinivasa Setty, it was observed that capital gains are not chargeable when the cost of acquisition cannot be ascertained.[35] This decision of the SC is a precedent and has been observed in subsequent cases as well.[36] Thus, it is fait accompli that capital gains which cannot be determined and which are earned from intangible assets, cannot be taxed for capital gains.[37] Thus, capital gains earned via the mining of cryptocurrencies, would be exempted from the scope of taxation.
However it is very important to note that as this infringes on the very legitimate revenue of the government, it would not be quite long till government comes out to block the escape route. Indeed, the government has Section 55A which can be utilized as per which reference can be made to valuation officer for calculating the fair market value of the cryptocurrency at the time of its creation (via mining).[38] This value could be used as cost of acquisition to determine capital gains, and therefore the escape route would be blocked.
2. Taxation under Profits and Gains from Business and Profession
The taxation treatment is straightforward when the cryptocurrencies are held as trading assets, as the issues arising under the previous head of capital gains are not present in this case. Section 2(13) provides a very wide and inclusive definition of business comprising of “trade, commerce or manufacture or any adventure or concern of such nature.”[39] Hence, any continuous activity of trade in cryptocurrencies will come in the scope of business and any profits earned consequently will be taxable as per section 28 of the Act.[40] The profits are taxable notwithstanding the fact that they are not realised in the capital form and are realized in kind.[41] Further, any expenditure made by the assesse for the commencement of the business should be deducted when calculating the total net profit in accordance with the sections 30 to 43D of the Act.[42]
Thus in general, mining of cryptocurrencies can be taxed and its fair market value can be construed as taxable income under the Act. However, there is still uncertainty as to the valuation when the cryptocurrency is mined which needs to be resolved. Further, absence of any requirements of disclosure makes the task of regulator very cumbersome.
IV. Taxation of Crypto Currency Under Indirect Tax
Good and Services Tax (GST) has been in effect since July 1, 2018 and has remained in the limelight since its inception.[43] The consequences of charging GST on cryptocurrencies has been an issue of controversy and has been debated by many scholars.[44]
In the event that cryptocurrencies are considered to be goods or property, then they will be subject to GST because of the reason that supply of cryptocurrencies would be regarded as a taxable supply.[45] Further, supply of cryptocurrencies as goods or properties in exchange for other goods or properties will fall in the scope of barter transaction as it is an exchange for other goods whether real or virtual..[46] As per the GST Act, tax can be charged on supply or service or both and includes barter transactions. Therefore, cryptocurrency transactions are not exempted from GST merely for the reason of non-use of money in these transactions.[47]
A. Application of GST on Cryptocurrencies
Three cases come into picture when charging of GST on cryptocurrencies is concerned –
“i. Transactions involving exchange of cryptocurrencies,
ii. Transactions involving exchange of cryptocurrencies for goods and services, and
iii. Transactions involving exchange of cryptocurrencies for goods and services through intermediary.”[48]
In case I as described above, if the parties are registered as well as situated in India, tax will have to be paid on both value of cryptocurrencies and the commission for any transaction which involves exchange of cryptocurrencies for which commission is charged separately. The reason for the same is that exchange of cryptocurrencies is regarded as supply of goods/services and commission charged would come within the meaning of consideration for the service.[49]
In case II, tax is charged on the value of the transaction. For example, if X buys the house of Y for 100 bitcoins, then the value of 100 bitcoins will be liable for taxation.
In case III, where cryptocurrency is obtained by an intermediary from A in consideration for goods and services on behalf of B, two different transactions which took place while providing normal currency to B. The first transaction is taking place between A and B and the next transaction is taking place between intermediary and Y, both of which are separately chargeable. In all of the above mentioned cases, if the cryptocurrency supplier (A and B in cases II and III, respectively) is not registered, the transaction would be taxed on the basis of reverse charge.[50]
A proposal of imposing 18% GST on bitcoin transactions, which would amount to around 40,000 crore rupees annually had come before the Central Government.[51] This proposal has been forwarded by the Central Economic Intelligence Bureau (“CEIB”) to the Central Board of indirect Taxes & Customs (“CBIC”). It has been suggested that the Central Government could possibly receive 7,200 crore rupees annually by virtue of trading in bitcoins in India.[52]
B. Challenges of applying GST on cryptocurrencies
Although the legal mechanism of taxation discussed above seems viable, it is subject to some glaring shortcomings that need to be rectified. Some of these challenges have been discussed below.
1. Presumption of cryptocurrency as goods
The assumption or the presupposition on the basis of which GST could be charged on cryptocurrencies was such that cryptocurrencies were to be considered as goods. Such a transaction is susceptible to double taxation – firstly on supply (which would get exemption if transaction through money is involved) and secondly on consideration, which would further lead to a much higher tax chargeable.[53] Such increased taxation would have the tendency to put business entities using or dealing in cryptocurrencies at a great disadvantage. As a result, their value and purchasing capacity would diminish. The issue becomes even more complex if international transactions are involved, i.e., when either the supplier or the receiver is situated outside India.[54]
2. Valuation
The aspect of valuation of cryptocurrencies poses yet another challenge. Generally, the value of such a currency is ascertained by determining its conversation rate into the normal currency at a given point of time. However, in case of cryptocurrencies, their market values might not fairly and accurately represent their assessable value and so, we cannot universally apply the said fundamental procedure to cryptocurrencies. Therefore, there is chance of there being a disparity between the value of goods and cryptocurrency. Furthermore, there also might be instances where there is a mismatch between the cost accrued to one party and the value receivable on part of the other party.[55]
By and large, Section 15 of the GST Act is applied in such scenarios where the price is paid or is payable with respect to the supply of commodities or services and the transacting parties are in no way related.[56] However, in circumstances where the price does not comprise the only consideration or where there is a different consideration, the GST (Determination of Value of Supply) Rules, 2017 will apply.[57] In case of such a transaction, the market value would be the value of supply. Therefore, in case of cryptocurrencies, the value would be its transaction value that gets listed on a particular price index (such as the bitcoin price index [BPI]), at the date of issuance of invoice or the date of payment, whichever is earlier.[58] The nature of cryptocurrencies is such that they are highly volatile. People usually transact or make payment when its value is on the lower end. This would lead to lesser tax collection.
3. Reverse charge mechanism
According to the reverse charge mechanism, supply of service to an authorized and registered person by any unregistered person situated outside India is taxable.[59] Therefore, the reverse charge mechanism (“RCM”) would get attracted in case taxable cryptocurrency services are supplied by unregistered foreign entities and hence, the receiver would be under the obligation to pay the entire tax. A substantial issue that has always been faced by the regulators refers to the ascertainment of place of supply for virtual transactions. This is because transactions of this nature are anonymous and highly decentralized, more so in the case of cryptocurrencies. Furthermore, the issue becomes more convoluted as disclosure of location is required only on part of the receiver of the supply and not the provider of the service. Therefore, chargeability under the RCM seems implausible, until and unless there is voluntary disclosure of the transaction details on part of the recipient.[60]
V. Analysis & Conclusion: Way Forward for India
India needs to redefine its financial handling to address its economic woes and achieve financial well-being, especially in light of the pandemic and neighboring countries’ influence. Taxation of cryptocurrency can provide a solution, but Indian regulators need to recognize its potential and not follow China’s restrictions. Instead, India can follow Japan’s example of becoming a cryptocurrency-friendly jurisdiction with minimized taxation. A full-fledged policy that encourages the use of cryptocurrencies and addresses taxation challenges is necessary. Charging only clearly chargeable fees for cryptocurrency transactions can help gain foreign investors’ trust and generate revenue. A progressive approach is the best way to address India’s economic depression.
While the above explains the reforms that can be brought about to integrate cryptocurrency into the Indian taxation and economic framework at a macroeconomic level, we must also understand the implications from the lens of a common investor to understand the implications.
The new tax regime does appear to be a strong whip on crypto trading. With crypto being accorded the highest tax slab for any asset class at 30 percent and the implementation of a 1 percent TDS on bigger trades, investors may feel the pinch if they react to certain market movements with additional trades. However, we do believe that the gains from crypto and NFTs are still considerably high, and a 30 percent tax rate may not discourage most investors. In fact, we see a growth in investor base on account of it being accorded legal status.
- Investors need to time trade to optimize on tax
More than ever, crypto investors must time their trades to ensure they optimize their tax liabilities. Because losses can’t be offset with other assets or carried forward, any sale at a loss will be painful for investors. Given the crypto market has considerable volatility, investors need to be patient in juggling both the market and the tax regime to maximize their returns.
- Long-term investors need a helping hand
The current regime does not distinguish between short-term and long-term (above one year) investing in the ecosystem. Long-term investing usually has a subsidized taxation policy (or a rebate) as it encourages investors to hold on to an asset for maximising their returns. We do believe that the Government will relook at this in the future.
- Bookkeeping will be cumbersome
The Government has given considerable thought to the ecosystem and has entrusted the key responsibility of tracking and reporting gains with the companies and investors. Investors who do thousands of trades across exchanges in a year will have to painstakingly note and record them all to arrive at a tax liability. However, developed nations do have systems and services that do this and hence we believe that services will evolve to incorporate this requirement. We, at Giottus, are already building a product for easing this process to generate easy P&L and tax statements.
There are some nitty-gritties that need to be ironed out and explained for the common investor. Educating them in the right way will be crucial for the success of this tax regime. We also believe that as many investors flock to the ecosystem and the Government gets to understand its functioning better, we will be able to see additional discounts and adjustments being introduced in the tax slabs.
- Overall, a welcome development
While the Government has taken a pragmatic approach to ensure that the growth of an ecosystem does come with certain limitations before its wide ramifications are understood, there are many benefits that the ecosystem can realize immediately. This tax regime along with a virtual digital assets bill, when presented, will legitimize all businesses operating in the country as well as enable consumer protection for investors. Standard regulatory compliance with respect to KYC and AML/CTF as well as tax compliance with respect to TDS and GST will be mandated across companies and may help in weeding out certain bad actors in the ecosystem. Exchanges and related platforms will become the legal gatekeepers of the industry. Along with the digital rupee that is purported to be enabled via the blockchain by RBI, the Indian crypto community can trade with ease as well as with certainty on their investments.
Overall, we believe that the crypto ecosystem along with its businesses and investors are primed for growth in the upcoming future. The Government has already laid the foundation for a thriving and sustaining industry.
[1] Sunainaa Chaddha, 30% tax on income from digital assets: All you need to know, Times of India (Feb. 1, 2022), https://timesofindia.indiatimes.com/business/india-business/30-tax-on-digital-assets-all-you-need-to-know/articleshow/89267925.cms.
[2] Yeesha Shriyan, India’s framework for crypto tax still needs work, LiveMint (Feb. 10, 2022), https://www.livemint.com/money/personal-finance/indias-framework-for-crypto-tax-still-needs-work-11644338983665.html.
[3] Prakhar Khandelwal & Rachita Shah, “Position of Cryptocurrencies under the Indian Taxation Regime”, https://cbcl.nliu.ac.in/taxation/position-of-cryptocurrencies-under-the-indian-taxation-regime/.
[4] Hatim Hussain, “Reinventing Regulation: The Curious Case of Taxation of Cryptocurrency in India”, 10 NUJS Law Review 4 (2017).
[5] What is Bitcoin?, Bankrate, https://www.bankrate.com/investing/crypto-vs-stocks/#:~:text=But%20there%20are%20numerous%20differences,backed%20by%20anything%20at%20all..
[6] Id.
[7] Dindayal Dhandaria, “Taxation of Cryptocurrencies in India”, 88 Taxmann.com 299 (2017).
[8] Krishnan Menon, “Cryptocurrency and Income Tax in India”, available at https://news.cleartax.in/cryptocurrency-and-income-tax-in-india/.
[9] Harshad Shinde, Bitcoin and GST in India, available at – https://www.avalara.com/in/en/resources/press/bitcoin-and-gst-in-india.html.
[10] (2020) 10 SCC 274.
[11] ibid [136].
[12] B.R. Nagarajan v. Income Tax Officer, Ward-1 (1), Trichy (Civil Appeal Nos. 8208-8210 of 2019)
[13] Rashmi Deshpande v. Union of India (W.P. (C) No. 10711 of 2018):
[14] Koinex Solutions Pvt. Ltd. v. Union of India (W.P. (C) No. 373 of 2020):
[15] Income Tax Act 1961, s (24).
[16] Neil Borate, ‘Government lists bill to ban Bitcoin in India, create official digital currency’ (LiveMint, 30 January 2021)
[17] https://timesofindia.indiatimes.com/business/india-business/big-infra-push-digital-currency-crypto-tax-10-takeaways-from-union-budget-2022/articleshow/89270732.cms
[18] Income Tax Act 1961, s 194B.
[19] Anuradha Shukla and Apoorva Mittal, ‘Crypto mining infrastructure cost not treated as cost of acquisiotn’ The Economic Times (31 March 2022)
[20] Kateryna Solodan, ‘Legal Regulation of Cryptocurrency Taxation in European Countries’ (2019) 6 Eur J L & Pub Admin 64, 68.
[21] ibid.
[22] Id.
[23] The Income Tax Act, 1961, § 2(24).
[24] Supra Note 2. Hatim Hussain, “Reinventing Regulation: The Curious Case of Taxation of Cryptocurrency in India”, 10 NUJS Law Review 4 (2017).
[25] Homi Mistry, How to report cryptocurrency gains, losses in income tax return, Economic Times (Sep. 30, 2021), https://economictimes.indiatimes.com/wealth/tax/how-to-report-cryptocurrency-gains-losses-in-income-tax-return/articleshow/86394660.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst.
[26] The Income Tax Act, 1961, §2(14).
[27] The Income Tax Act, 1961, §2(14) (ii); Faiz Murtaza Ali v. CIT, IT Appeal No. 613 of 2012.
[28] Commissioner of Income Tax v. B.C. Srinivasa Shetty, (1981) 2 SCC 460.
[29] Supra Note 4. Krishnan Menon, “Cryptocurrency and Income Tax in India”, available at https://news.cleartax.in/cryptocurrency-and-income-tax-in-india/.
[30] The Income Tax Act, 1961, §112; Clear Tax, Long Term Capital Gains on sale of stocks, shares, etc., available at https://cleartax.in/s/ltcg-sale-stocks.
[31] Supra Note 2.
[32] The Income Tax Act, 1961, §§ 45, 48 and 49.
[33] Naveen Wadhwa, “Taxing Cryptocurrencies in India”, available at https://www.thehindubusinessline.com/opinion/taxing-cryptocurrencies-in-india/article10012267.ece.
[34] Supra Note 2.
[35] CIT v. B.C. Srinivasa Setty 128 ITR 294.
[36] Bawa Shiv Charan Singh v. CIT, (1984) 149 ITR 29.
[37] Supra Note 2.
[38] The Income Tax Act, 1961, §55A; Hatim Hussain, “Reinventing Regulation: The Curious Case of Taxation of Cryptocurrency in India”, 10 NUJS Law Review 4 (2017).
[39] The Income Tax Act, 1961, §2(13).
[40] The Income Tax Act, 1961, §28; “Tax Guru, Profits and Gains from Business and Profession-Brief Study”, October 7, 2019, available at https://taxguru.in/income-tax/profits-gains-business-profession.html.
[41] Dindayal Dhandaria, “Taxation of Cryptocurrencies in India”, 88 Taxmann.com 299 (2017).
[42] Supra Note 2.
[43] Abhay Desai, “Prospects of Taxation of Cryptocurrencies under GST”, 89 Taxmann.com 30 (2018).
[44] Id.
[45] Id.
[46] Vijay Pal Dalmia, “Taxation of Cyrptocurrency India”, available at – https://www.mondaq.com/india/tax-authorities/1023174/taxation-of-cryptocurrencies-in-india%20payment’.
[47] Cleartax.in, “Income tax on Bitcoin and its legality in India”, available at – https://cleartax.in/s/bitcoins-taxes-india.
[48] Prakhar Khandelwal & Rachita Shah, “Position of Cryptocurrencies under the Indian Taxation Regime,” available at https://cbcl.nliu.ac.in/taxation/position-of-cryptocurrencies-under-the-indian-taxation-regime/.
[49] Supra Note 2.
[50] Id.
[51] Pradeep Thakur, Govt Weighs Imposing 18% GST on Bitcoin Trade, The Times of India, available at http://timesofindia.indiatimes.com/articleshow/80001885.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst.
[52] Id.
[53] Id.
[54] Id.
[55] Supra Note 26. Abhay Desai, “Prospects of Taxation of Cryptocurrencies under GST”, 89 Taxmann.com 30 (2018).
[56] The Central Goods and Service Tax Act, 2017, §15.
[57] Supra Note 2.
[58] Id.
[59] Supra Note 26.
[60] Id.
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Author: Deepanshu Verma and Aditya Singh, National Law University, Jodhpur
