TAXATION ON CRYPTO CURRENCY: BOON OR BANE

What is Crypto currency?

Every individual is engaged in trade activities even from their initial stages. With the evolution of technology and finance industry, mode of exchange are also evolving. From the era of barter exchange to evolution of commodity, gold and silver, metals and coins, and net banking as a medium of exchange, finance industry has seen upsurge. Innovation of Crypto currency as a mode of exchange has been a revolutionary step. Crypto currency is a form of virtual digital asset and a block chain system that uses cryptography to ensure transparency of the currency. Many countries treat crypto currency as assets or as another medium of exchange like money but in India, it is not treated as any other legal tender. It is not termed as an Indian currency or foreign currency as per FEMA,1999. In Budget 2022, the position of crypto currency was made somewhat clear and termed them as Virtual Digital Assets (VDAs).

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How Crypto currency Works?

Crypto currency is a blockchain network and every transaction, whenever it occurs, is broadcasted to all computers on the network. Every new transaction, called as a block, is connected with other transactions which makes double spending of the crypto currency difficult as it would involve changing in every subsequent block. All the transactions are recorded in a ledger and it is open to all the computers in which these transactions are recorded in some coded form known as cryptography. Every transaction is linked with each other creating block chain network. Crypto currency and other crypto products such as Bitcoin, Litecoin, Ethereum, Dogecoin etc. are treated differently in different countries of the world but they are more or less similar in terms of use of technology. It allows users to made peer to peer transaction and all the transaction are open to all the users. Safety of the transactions and private information are ensured through cryptography.

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Pros’ and Cons’ of Crypto currency

??All crypto currency transactions are public and transparent to all users. Users can at any time verify the transaction details.

??Transactions are less time consuming and less costly in crypto trading than any other financial transaction due to absence of any third person.

??Users can encrypt their wallets and use of new technology provides protection against frauds.

??Crypto currency had brought a revolutionary change in finance sector and it is easily accessible across the world.

??No third party had control over the transactions done by individual that provides for transparency and security.

??Due to absence of any intermediary such as banks, financial institutions or any regulatory authority, risk over the transactions remains very high.

??In the absence of any legal backing from the government, it is difficult to trust investing in such digital assets.

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Legality of the Crypto currency in India

Crypto currency in India needs more precised and detailed clarification as to the legal position. Indian government has not yet granted any status of legal tender but FM Nirmala Sitaraman had announced in Budget 2022 that any income from sale of this transaction will be taxed w.e.f. April 1, 2022 at the rate of 30%. Although, crypto currency has been made taxable, it is not necessary that it has become legal to trade in VDAs. Already 8% of the population has invested in these virtual currency and it would not have been reasonable to put ban and made them illegal.

For the purpose of defining crypto currency,?a new clause 47A has been inserted in section 2 of the Income Tax Act, 1961 to define VDA. It includes Non-fungible token and any other token of similar nature.

Now the question arises whether it is a currency or an asset??In order to treat crypto currency as a currency , it needs to be stamped and issued by sovereign having authority to treat them as?a commodity. Crypto currency does not fulfil the condition to make them money. It is neither a financial assets as it neither creates any person’s liability nor do they have any cashflows. They can be treated as digital assets as it neither fall under the category of money, securities or financial assets.

The status of the crypto currency is not clear and still requires clarification from the government. Trading in crypto currency has been made legal by imposing tax but it is still not treated as legal tender.

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How Tax can be Calculated?

Investors before investing in crypto currency must understand the concept of taxation and how much tax will be imposed on them. Though more clarifications are needed from the Government of India, it is essential for the investors to consult their chartered accountants before actually investing.

1.????According to Budget 2022, tax have been imposed on transfer of crypto currency and investors have to pay 30% on net profits arising out of the transfer of crypto currency w.e.f April 1, 2022. Also, all transactions will subject to 1% TDS with effect from 1st July,2022.

2.????Investors will be liable to pay tax @30% on Digital Assets irrespective of their tax slabs.

3.????Section 115 BBH, clause (2)b of The Income Tax Act, 1961 prohibits setting off a loss under ‘any other provision’ of the Act. But for the purpose of VDAs, ‘other’ has been removed under the bill. It means if any loss had incurred during the financial year from the transfer of Virtual Digital Assets, it can’t be set off against any other income. Also, losses incurred from one Virtual Digital Currency cannot be set off against income from another digital currency. For eg. If any person incurs loss of Rs.50000 from sale of Bitcoin, while incurs profit of Rs.1,00,000 from the sale of shares, he cannot set off his loss from the profit earned from shares.

4.????Investors would have to bear loss/ gain only in that financial year in which transaction takes place. One cannot forward last year’s loss to this year. For example, ?A suffers a loss of Rs. 50000 last year and incurred a profit of Rs. 1,00,000 next year, then it cannot set off the loss of previous year to this year.

5.????As per Section 56(2)(x) of The Income Tax Act, 1961, crypto as a gift to another person will be taxed in the hands of the receiver.

6.????Deductions from the sale consideration from the transfer of the crypto currency can be made only from the ‘cost of acquisition of crypto currency’. Also infrastructure cost incurred on mining crypto assets will not be treated as cost of acquisition.

7.????Applicability of TDS provision:

TDS shall be deducted at time of the payment or at the time of credit of such sum to resident person, whichever is earlier. The threshold limit for TDS would be Rs.50000 a year for specified persons, which includes individuals/ Hindu Undivided Family.

The government had made provision to deduct 1% TDS from every transactions that takes place in India. The main aim is to record all the transactions taking place under this category.

The investor is entitle to file ITR(Income Tax Return). This should not be treated as additional tax as anyone can take credit by filing ITR. It has been made to ensure recording of every such transactions.

8.????If an investor classified this as his investment, then any gain/loss incurred by him will be treated as capital gain/loss and will be taxed accordingly. If they were held for less than 3 years, it will be treated as short-term capital gains and tax will be calculated as per their applicable tax slabs. In case of long-term capital gains, tax will be calculated @20% with indexation benefit.

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International Parlance

Nowadays, more or less every country is imposing taxation on crypto currency. Some of the countries consider them as a legal tender and even can be used to exchange them for money. In many countries, they were seen as illegal to transact crypto currency. Further, U.S. Government classified them as a ‘property’ and thereby levy capital gain taxes on gain on sale of crypto currency. In India, unlike U.S., the tax on crypto will be treated separately from taxes levied on capital gains from other investment viz. investments in stocks, share maeket and funds. Every country perceives crypto currency differently.

?Conclusion

Imposing tax on crypto currency is indeed a great step towards the enhancement of our economy. Taxes runs our country and provides fund for the development of various backward areas. This step by Indian Government shows that government intended to dissuade investment in volatile assets instead of outright banning them. It seems to be very negative news but the truth is different. Investors were already bound to pay taxes on crypto currency prior to the Union Budget, tax were imposed on individuals according to their tax slabs and there was no clear rules and regulations that provides for the taxation. Their move to tax the digital assets is a way forward to accept the technology used in running of the crypto market. Although it can be considered as a good step but there is still a need for more specified rules and regulations to run the VDAs by the government. There is a need to have a separate regulatory authority like in case of shares and other security exchanges.

Paying tax is not a punishment but a moral obligation of every citizen of a country for the enhancement and development of the economy. One should proudly consider them as a taxpayer and contributor in development of the country.