At present, no legislation governs, regulates, or prohibits dealing in cryptocurrencies in India. Therefore, it is not illegal to sell, purchase, deal or mine cryptocurrencies or set up a cryptocurrency exchange in India. Considering the size of the market, the amount and the risk involved, cryptocurrencies should be taxed as follows.
Bitcoin was the first cryptocurrency to hit the market in 2009. After that, several cryptocurrencies were launched including Bitcoin Cash, Ripple (XRP), Litecoin, etc. As per an estimate, more than 8,000 cryptocurrencies exist as of January 2022.
As per a recent study by Nasscom and WazirX, India’s cryptocurrency market has seen exponential growth over the past few years. It is expected that the investment by Indians in cryptocurrency could touch $241 million by 2030. Currently, India has the highest number of crypto owners globally.
At present, no legislation governs, regulates, or prohibits dealing in cryptocurrencies in India. Therefore, it is not illegal to sell, purchase, deal or mine cryptocurrencies or set up a cryptocurrency exchange in India. However, considering the risks associated with investment in cryptocurrencies, there was speculation that a bill, set to be introduced in the Winter Session of Parliament, may either ban or regulate cryptocurrencies. However, the bill was not introduced, and it is now expected that the government may take up this bill in the Budget Session. If the government does not prohibit Indians from dealing in cryptocurrencies, the government could introduce a regressive tax regime for cryptocurrencies.
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Considering the size of the market, the amount and the risk involved, cryptocurrencies should be taxed as follows:
1.Classification as capital asset
In view of Section 2(14) of the Income-tax Act 1961, cryptocurrencies could be deemed capital assets if purchased for investments by taxpayers. Therefore, any gain arising on the transfer of a cryptocurrency shall be taxable as capital gains. In contrast, if the transactions in cryptocurrencies are substantial and frequent, it should be held that the taxpayer is trading in cryptocurrencies. In this case, income from the sale of cryptocurrencies shall be taxable as business income.
Further, as per the Organisation for Economic Co-operation and Development’s (OECD) report on Taxing Virtual Currencies, almost all countries consider cryptocurrencies a form of property; most commonly, an intangible asset other than goodwill. Since the current provisions of the Income-tax Act are capable of treating cryptocurrencies as a capital asset, there is less chance that we could see any amendments regarding this aspect. However, it is recommended that the government should define the word ‘cryptocurrency’ to make it clear that it is not a currency or a legal tender.
The concept of ‘Tax Deducted at Source’ and ‘Tax Collected at Source’, commonly known as TDS and TCS, was introduced to ensure regular flow of revenue to the government. The primary aim of this concept is to collect tax revenue from the very source of income.
To capture the financial footprint of the person dealing in cryptocurrencies, it is recommended that the government introduce new TDS and TCS provisions on the sale and purchase of cryptocurrencies. The crypto exchanges facilitating the transactions of sale/purchase of cryptocurrency should be made liable to deduct and collect tax at source. The government should exempt small investors and prescribe a threshold limit for such deduction and collection of tax.
3. Reporting in SFT
The Statement of Financial Transaction (SFT) provides a reporting mechanism wherein specified entities must provide information about material financial transactions to the Income Tax Department. The Income Tax Department has recently rolled out the new Annual Information Statement (AIS) on its Compliance Portal. The AIS contains various information about the income and financial transactions of an assessee. It can be accessed online by logging into the tax department’s e-filing portal.
It is recommended that both the sale and purchase of cryptocurrencies should be brought within the ambit of reporting in the Statement of Financial Transactions. Trading companies already do similar reporting of sale and purchase of shares and units of mutual funds.
4.Higher tax rate
The government should introduce a higher tax rate for crypto gains. A 30% tax rate similar to gains made from lottery, game shows, puzzles, etc., should be introduced for the income arising from the sale of cryptocurrency.
5. Loss should not be allowed to be set off against other income
The cryptocurrency market is highly volatile and uncertain. The price of virtual currencies fluctuates significantly. As per OECD’s report on Taxing Virtual Currency, Bitcoin’s two-year return (between 2017 and 2019) was 457%, representing a much greater growth than major stocks of India. On the other hand, Ethereum and other virtual currencies faced a dramatic decrease in their value.
Considering the uncertainties and to discourage investment in these virtual currencies, the government should not allow adjustment of loss arising on sale of cryptocurrency against any other income. Further, it should not allow carry- forward of crypto loss for the purpose of set off against future income from cryptocurrencies.
(The authors are CA Naveen Wadhwa, Chartered Accountant and DGM – R&D, Taxmann, CA Rahul Singh, Chartered Accountant and Manager – R&D, Taxmann.)
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