Taxing crypto currencies in India!

The very first-time cryptocurrency was officially acknowledged in India was through the press release in 2013 and subsequently in 2017 by the RBI cautioning investors of the risks associated with Cryptocurrencies (Press Release: 2013-2014/1261 dated: 24/12/2014). Thereafter the RBI issued “Statement on Developmental and Regulatory Policies” on April 5, 2018, which expressly prohibited banks from dealing in cryptocurrency or providing any services to market participants in support thereof. This made it practically impossible for the market participants to regularly engage in trading of cryptocurrency. This statement of RBI was set aside by the Hon’ble Supreme Court in its landmark judgement in March, 2020 in the case of?Internet and Mobile Association of India?v.?RBI?[2020] 115 taxmann.com 53 (SC).?

On a similar note, in consonance with the attitude of RBI, the legislature introduced the Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 which sought to prohibit mining, holding, selling, trade, issuance, disposal or use of cryptocurrency in the?country.?

Cryptocurrency was defined as any information, code, or token?which has a digital representation of value and has utility in a business?activity,?or acts as a store of value, or a unit of account. Under the draft Bill, mining, holding, selling, issuing, transferring or use of cryptocurrency was punishable with a fine or imprisonment of up to 10 years, or both,?however holders of cryptocurrency were given a window of 90 days to declare and dispose any such cryptocurrency in its possession.?It also hinted at a RBI backed digital rupee as legal?tender. However,?the Bill couldn’t make its place owing to the prevailing movement of?cryptocurrency.

Likely taxable implication of Cryptocurrencies in India

The income generated through cryptocurrencies can be classified under the heads of Profits and gains of business or profession, Income from Capital Gains or Income from other sources based on its designation to be determined by the Government of?India.

The possible Income tax implications could be classified into various heads of Income:

1.?Profits and gains of business or profession

The?“miner”?who?would?facilitate?the?entry?of?new?cryptocurrency?are?subject?to?income?tax?under this head of income.?However,?the determination of the status of the cryptocurrency, i.e., its place of origin and subsequent taxation could be challenging. This would directly impact the taxability of the cryptocurrency with respect to issues in international taxation and recourse may be required to resources of international taxation like double taxation, avoidance treaties. The miner has to make investments in the form of computing resources and electricity etc. into the mining activity and therefore can claim the computer resources deployed towards mining as a Capital “Plant and Machinery” while the electricity bill and other expenses including the bandwidth charges may be claimed as revenue?expenditure.

The second side of the coin as far as profits from gains and professional income is concerned is the treatment of the income earned from trading of cryptocurrency. Trading?however,?brings with it a high chance of cross border element, given the virtual nature of cryptocurrency and its ambiguous geographic location. Hence issue of international taxation issues could come in place like Permanent Establishment (PE) or interpretation of relevant tax?treaties.

The introduction of the “Equalization Levy” also brings the possibility of taxation for the purchase of cryptocurrency that is purchased from abroad: Section 164 of the Indian Income-tax Act'1961 has the potential of being squarely applicable to the trading of cryptocurrency while section 164(ca) has the possibility of being directly applicable to the cryptocurrency exchanges/institutional sellers as well as individual sellers etc. that are selling cryptocurrency?online.

2.?Capital Gain

The definition of “capital assets” is contained within the Act and includes “property of any kind held by a person whether or not connected with his business or profession”. The term “property”, though has no statutory meaning, yet it signifies every possible interest that person acquires or enjoys in a?property.?A cryptocurrency would therefore fall under the definition of “capital asset” as defined under the Act.?Accordingly,?if a person is involved in the business of trading in cryptocurrency and the gains made therefrom could be taxed as “business income”. On the other hand, if a person holds the same as investments and the frequency of the transactions is not?regular,?then the gain from the same will be taxed under the head “capital gain”. If the cryptocurrency held by the person for less than 36 months, then the gain from the same will be taxed as short-term capital gain and it is held for more than 36 months, then the gain therefrom will be taxed as “Long term Capital?Gain”.

3.?Income from Other Sources

Section 56(1)(ib) makes “any winnings from lotteries, crosswords puzzle, races including horse races, card games and other games of any sort or gambling, betting of any form or nature whatsoever “as an income from other sources. It is no news that cryptocurrency is highly volatile in nature as its value is dependent on what investors are willing to pay for it. Thus, a pragmatic view can be taken that the taxation of cryptocurrency may move beyond the realm of business profit and capital gain and move into the realm of “income from other sources”.