What are the Tax Implications for Cryptocurrency Assets in India?

Posted by Written by Naina Bhardwaj Reading Time: 6 minutes

Cryptocurrency in India may attract tax liability, but the rules are still unclear as the Reserve Bank of India has not yet granted this asset class the status of a legal tender. However, in March 2020, the Indian Supreme Court permitted banks to handle cryptocurrency transactions from traders and exchanges.

India’s economic intelligence and law enforcement agency, Enforcement Directorate’s recent move in June, 2021, however, raises doubts over the continued trade of cryptocurrency in India.

In this article, we discuss the generation, purchase, and sale of cryptocurrencies in India, key points where their transactions may have tax implications, and the government position on their usage.

Digital ‘crypto-currency’ or ‘crypto assets’, including stablecoins and tokens, are a form of decentralized digital money, based on blockchain technology – a distributed ledger enforced by a disparate network of computers. Ranging from decentralized digital tokens, such as Bitcoin, to official, sovereign-backed, central bank digital currencies – digital currency has found increasing acceptance as well as enthusiasm among its users.

These digital currencies aim to emulate the uses of traditional money as a means of payment, a store of value, and a unit of account. Mostly used for the purpose of investment, they have also been used by businesses as payments in lieu of goods and services exchanged. Since they are not issued by any central authority, these cryptocurrencies are immune from government interference and manipulation for now.

As of early 2021, there were over 4,000 different cryptocurrencies in circulation worldwide, including the market giants Bitcoin, Ethereum, Litecoin, and Dogecoin. Despite the exponential increase in the number of digital currencies, 90 percent of the market is claimed by the top 20 cryptocurrencies. As of May 2021, the aggregate value of all the cryptocurrencies in the world stood at US$2.8 trillion.

Cryptocurrency in India

As per data from blockchain analytics firm Chainalysis, Indian investments in cryptocurrency have surged to US$6.6 billion in 2021, driven by a shift in the thinking of young investors – moving away from gold and other precious metals. Another reason is the security and transparency provided by this technology.

As per a report, over 10 million crypto investors were added by India in 2021. This is noteworthy in light of speculation that the federal government plans to impose a ban on the use of cryptocurrency. However, nothing can be said conclusively unless the law regulating the digital currency is passed.

How is cryptocurrency acquired or generated?

Cryptocurrency can be generated in the following ways:

  • Mining: “Mining” crypto is when an individual miner uses computing technology to solve complicated algorithms/codes/equations and record data on the blockchain. In exchange for this work, one may receive payment in new crypto tokens.
  • Buying: Buying it from currency exchanges using real currency and storing it in an online currency wallet in digital form.
  • As legal tender: It can be used as a consideration for sale of goods and services, instead of real currency.

Legality of cryptocurrencies in India

In 2018, the Reserve Bank of India (RBI) banned the use of cryptocurrency as legal tender in India by issuing a circular. However, this decision was overturned by the Indian Supreme Court in March 2020, permitting banks to handle cryptocurrency transactions from traders and exchanges.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 has been tabled by the government in the parliament and will most probably be taken up for discussion in the monsoon session.

Insights from the Enforcement Directorate notice to WazirX

The Enforcement Directorate (ED) recently issued a notice to India’s crypto exchange WazirX over possible Foreign Exchange Management Act (FEMA) violations for the act of making withdrawals from crypto wallets, as it seeks ledgers for the transfers worth INR 27.91 billion (US$372.4 million).

Presently, the holders of cryptocurrency can freely transfer coins from their wallet to another wallet, anywhere across the globe. Such overseas transactions without proper documentation are considered potent routes for money laundering, thereby violating forex rules, by the ED.

Cryptocurrency exchanges, including WazirX, claim that they have complied with the Know Your Customer (KYC) norms to ensure identification and verification of the traders and investors who have accounts and wallets with them. If these traders or investors withdraw cryptocurrency, their exchanges can be traced to the address of the external wallet where the digital currency has been sent.

However, this knowledge does not include information identifying the person or entity owning the wallet that has received the crypto money. The ED have explained that mere KYC will not be sufficient to prevent the misuse of digital currency for procuring illicit items like drugs on the dark net, money laundering, or illegitimate betting, among other nefarious activities.

Similar concerns have been raised by legislators worldwide, and in 2019, the Financial Action Task Force (FATF), an intergovernmental organization to combat money-laundering prescribed the ‘Travel Rule’, advising custodians as well as wallet providers to share information on senders and recipients of crypto currencies. However, fintech professionals have pointed out that although this rule could be implemented at a domestic level, enforcing it at an international level with different jurisdictions might prove challenging.

Tax implications of cryptocurrency in India

The Reserve Bank of India (RBI) has not yet granted Bitcoin or any other cryptocurrency the status of legal tender in India. Hence, there are no clear rules or guidelines defining taxability for cryptocurrencies, which calls for specific clarification from the Income Tax (IT) department.

However, experts have speculated upon various possibilities in which cryptocurrency transactions can be taxed under the Income Tax Act 1961 as well as the Central Goods and Services Tax (CGST) Act, 2017 – depending on the type of transaction. Meanwhile, the Ministry of Corporate Affairs (MCA) has made it mandatory for companies to disclose cryptocurrency trading/investments during the financial year.

Taxation under the Income Tax Act

Here is a roundup of different cryptocurrency transactions and their tax implications under the Income Tax Act:

Profits and gains from business and profession

These transactions include receipt of cryptocurrency as consideration for sale of goods or supply of services, and sale and purchase of cryptocurrency as stock in trade. Such transactions are liable for taxation under the Income Tax Act.  Under Section 2(13) of the Income Tax Act, the definition of business is inclusive, comprising of “trade, commerce or manufacture or any adventure or concern of such nature.” Any continuous activity like trade in cryptocurrencies is included within this definition, and profits realized are taxable thereunder, chargeable under Section 28 of the Income Tax Act.

Income from other sources

These incomes include mining of cryptocurrency, dealing in cryptocurrency solely for the purpose of investment, and receipt of cryptocurrency in the form of gifts. These transactions are taxable under the Income Tax Act.

  • Generation of cryptocurrency through mining: Since the digital currency generated will be treated self-generated assets, there is uncertainty as to how they will be taxed and whether the provisions of capital gains will apply, or if it will be categorized under the head of ‘income from other sources’. Experts believe that currency generated through mining will indeed be considered under the head of income from other sources. It is to be noted that Section 55 of the Income Tax Act, which deals with the cost of acquisition and improvement, does not recognize mining.
  • Receiving Crypto currency in the form of gift: Gifts received are taxed under the head income from other sources, and are taxed at individual slab-rates. Consequently, cryptocurrency received as gift will be taxed under income from other sources at concerned slab-rate and cryptocurrency received as gift worth INR 50,000 (US$671.07) and above shall be entirely taxable.

Also, the exemptions from tax on gifts received may apply on cryptocurrency as well. Some of the exemptions from tax liability on gifts are gifts received:

    1. From relatives
    2. On the occasion of marriage
    3. Under a will or by way of inheritance

Salary and income from house property

Since the cryptocurrency is not recognized as legal tender by the government, employers cannot make salary payments using this digital currency. Similarly, payment of rent using this currency is not legal and hence not recognized. Therefore, it will not have any tax liability in India under the present law, unless specific guidelines for the same are announced.

Capital gains

Section 2(14) of the Income Tax Act defines a capital asset as ‘property of any kind held by the assessee whether or not connected with his business or profession’. Thus capital assets include all kinds of property except those expressly excluded under the Act. Therefore, any gains arising out of the transfer of cryptocurrency must be considered as capital gains, if they are held for investment.  Depending on the duration for which these crypto assets are held for the purpose of investment, they would be subject to taxation under long-term capital gains (20 percent post indexation) or short-term capital gains (taxed as per individual slab rate).

Taxation under the Central Goods and Services Tax Act

Any business activity pertaining to cryptocurrencies or crypto assets, unless specifically exempted, is taxable under the CGST Act.

Indian crypto exchanges already charge GST from their users. This indirect tax is included in the trading fee that exchanges add to the buying price of Bitcoin, Ethereum, Tether, etc. Furthermore, the exchanges pay GST to the government as part of their general tax payments.

Recently, the Central Economic Intelligence Bureau (CEIB) has raised a proposal to the Central Board for Indirect Taxes and Customs (CBIC) to bring cryptocurrency exchanges and platforms under the GST purview. It has suggested that cryptocurrency mining be treated as a supply of service as it generates cryptocurrency and charges transaction fees, and as such, should classify as an intangible asset and attract a GST of 18 percent. The CEIB has also proposed that the taxpayers operating as cryptocurrency miners will be required to register under GST if their annual revenue exceeds INR 2 million. GST will be liable on the transaction fee and/or the reward, which is the currency mined.

Recent reports also suggest that foreign crypto exchanges in India might have to pay GST at 18 percent on cryptocurrency transactions in India. An equalization levy at two percent might also be imposed on them. To include these overseas crypto exchanges under the Indian tax umbrella, the Indian government could categorize overseas crypto exchanges with Indian users as Online Information Database Access and Retrieval (OIDAR) services.

This article was originally published on July 6, 2021. It was last updated July 20, 2021.

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