In this article, Akancha of BVP Pune discusses tax on gains from selling cryptocurrency in India.
One click! And I just received money from the other corner of the world within minutes. This wish has been turned into reality by the foundation of the concept of cryptocurrency.
The rampant amount of ever-increasing data and the urge to secure and manage such data gave birth to the idea of decentralization. The era of decentralization of communication started with the age of the internet and further by the development of blockchain technology. The essence of this technology is anonymity. Anonymity refers to the elimination of any central authority from controlling the networks. Ergo, it can be governed by an autonomous organization having control over a set of networks. With an encrypted mode of transfer of technology, the presence of decentralized channels helps in providing flexibility to the transactions.
However, even after providing a wide range of facilities and acceptability such technology have not been brought under a proper regulatory regime although it has attracted the interest of policymakers. Regulating these new technologies and providing a proper framework is the need of the hour.
Application of blockchain technology: Cryptocurrency
The inception of bitcoins in 2009 by Satoshi Nakamoto (a pseudonymous individual or group) was one of the first applications of the blockchain technology. Bitcoins are the most prominent cryptocurrency used all around the world. As explained by its inventor(s) bitcoins are “completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust.” In simple words they are a mode of internationally transferring funds around the globe between two unknown parties in minutes with minimal transferring charges as compared to other money transmitters and without the interference of an intermediary. It can also be used as an investment vehicle. The other cryptocurrencies also have the same working base.
The need for taxing cryptocurrencies: Increasing acceptability
Post demonetization has given a boost to all types of digital transactions, thus raising the usage of cryptographic currencies especially bitcoins. After 18 days of the demonetization move, the price of bitcoin on popular bitcoin exchanges in India zoomed to $1020 from $757, and right now, it’s trading at $1704, per bitcoin. According to industry sources, nearly 300-plus enthusiasts of the cryptocurrency trade daily on Indian bitcoin exchange platforms. Most of these platforms boast of user registrations of more than a lakh. Bitcoin has given a whopping return of 892 per cent over the last one year. HighKart.com became the first e-commerce site in India to exclusively accept bitcoins as a payment method and Castle Bloom, a salon in Chandigarh, became the first physical outlet to start accepting the digital currency. The sale of bitcoins is now surging to a new level in India and the absence of any regulatory regime has disabled even the financial experts to determine its future. It is pertinent to note that due to its continuously changing value and ever-increasing worth, the holder of such currencies gains immensely from it and therefore it becomes necessary to make regulations regarding the same. To escalate the growth of economy taxing the financial market plays an important role. Ergo, it is essential to tax such immense gains for escalating the growth of the economy as well as regulating the income of citizens of the country.
Complications in taxing cryptocurrencies in India
The committee formed in April 2017 to form regulations regarding the validity of bitcoins noted that the very first question which arises while legalizing it and bringing it under the legal ambit is which act will govern the legality of bitcoin?
Since it is still not clear if bitcoin is a property or money it can come under a majority of acts like- The Reserve Bank of India Act, 1934, The Securities Contracts (Regulation) Act, 1956, the Consumer Protection Act or the Information Technology Act
Keeping apart the question of regulation of such currencies the problem arises even when it is taxed. Does scope of I-T act extend to cryptocurrencies for the purpose of taxation?
Are cryptocurrencies taxable in India?
An extensive scrutinization of I-T act shows that cryptocurrencies come under the scope of the definition of income as well as capital assets. Henceforth, it can be taxable both as capital gains tax or business tax.
Sec 2(14) of the I-T act defines capital assets and thus the currencies if made for the purpose of investment, should be treated as a capital asset. Thus, any gains arising on transfer (ie: sale) should be characterized as capital gains. The taxation of capital gains has been divided into two types by the I-T act for the purpose of taxation. They are- Short-term gains and Long-term gains.
Short-term capital gains are the gains that are more than Rs.10 lakhs and are taxed as 30% of the gains while long term-gains are the gains from the investment made for at least 1 year and are taxed as 20% of the total gain.
But the problem with these currencies is even if they come under the ambit of capital gains, due to their continuous changing value it is difficult to determine if they are short-term capital or long-term capital gains like equity shares and stocks.
For instance- If a bitcoin is sold immediately it will be a short-term gain but if an investor invests in bitcoins for at least 1 year, it will change to a long-term gain and will be taxed differently which is a major conflict.
Sec 2(24) of the I-T act defines income and includes every kind of income unless clearly exempted. The expression ‘income’ here includes any gain derived from land, capital or labour or in two or more of these. Examining the current taxonomy of India any gain from income is taxable even if it just holds a money worth and not received in form of real money or currency. E.g.- Exchanging Bitcoins with anything- Indian rupees, foreign currencies etc for buying things will give gains in values of Bitcoin and such gains should be treated as income likely to be taxed.
These contradictions bring me to an opinion that such digital currencies hold an important position in financial transactions and therefore should have a separate section under the I-T act to govern the mechanism of taxation. These confusions arose due to lack of any regulatory mechanism for such currencies and the conflict of its legality itself. But even if the use of digital currency is not legalized the government is planning to form a way to tax the gains obtained from such currencies. Click here to watch a video on taxing of cryptocurrencies.
Present legislation that can govern taxation on cryptocurrencies
There are a number of legislation’s in India which extend its ambit to governing virtual currencies. It is necessary that virtual currencies should be regulated as after its regulation they can be taxed.Virtual currencies can be regulated under any of the following acts in India
- Foreign Exchange Management Act, 1999– Since bitcoins are not a national currency it can be governed by the Foreign Exchange Management Act and can be termed as foreign currency. The act gives a very wide definition of currency and includes everything that can be notified by the RBI. Moreover, it can also come under the ambit of securities under this act. Hence bitcoins can be termed as foreign currency or securities and regulated under this act.
- Indian Copyright Act, 1957– According to various definitions bitcoins are a set of computer programmes. The copyright act defines computer programme and hence bitcoins can be governed by this act.
- Sale of goods act– Virtual currencies can be regarded as intangible goods under the definition of ‘goods’ under the Sale of Goods Act and hence can be regulated by it for the purpose of taxation. It can include sales tax, service tax and income tax for the income generated from the sale.
- Information Technology Act, 2000(2005) and Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011– The cryptocurrencies also contain a lot of personal information or any other data about the holder or the user of such currencies which needs to be protected and henceforth such privacy concerns can be governed by the IT act.
- Consumer Protection Act, 1986– An average Indian consumer needs to be protected against the frauds of these virtual currencies. Hence the penalties for breach of consumer rights can be used for governing frauds against the consumer and protecting the interests of the consumer.
- Securities Contracts (Regulation) Act, 1956– Sec 2(h) of the act defines securities and includes all types of stocks, bonds, debentures and hence bitcoins can come under the purview of this act.
Therefore, there are a plenty of acts that can govern the regulation of bitcoin in India. We just need to wait for the decision of the government and see the regulations which it implements for governing such currencies.
Filing of tax returns
Filing of tax returns is mandatory in India if the income of an individual is more than 2.5 lakhs. Filing of such returns in case of cryptocurrencies is a grey area as it has not been detailed in the act. For the purpose of filing these returns, the virtual currencies have to be treated as income from the business. If the income of such business is less than 2 crore then it is taxable under Sec 44AD of the I-T Act.
In case of longer income tax form the individual needs to file an ITR-4 or ITR-4S. ITR-4 along with balance sheet, profit, and loss statement etc. and in case of short-term income tax, only ITR-4S needs to be filed.
Before you start with filing your taxes you have to ascertain whether you are falling under business category or as capital investor.
There are generally two distinctions that can be made based on the way you trade, “In general, if you are trading in cryptocurrencies on a casual basis and mostly for investment purposes, your gains/losses will be considered as investments under the capital gains,” he says. “Depending upon your trading cycle, if you are more of an active trader you will be considered under the business category.”
International taxation of cryptocurrency
A majority of developed international financial markets have a proper mechanism for taxing cryptocurrency. Majority of countries have classified and other cryptocurrencies either in the form of money or property in order to bring it under the purview of taxation.
|S.no||Jurisdiction||Classification||Taxation||Banned||Mode of Regulation||Regulated|
|1.||U SA||Commodity||Yes||No||Internal Revenue Service (IRS)||Unclear|
|4.||UK||Income||Yes||No||Revenue & Customs Brief||NO|
|5.||Australia||Income||Yes||No||Income Tax Assessment Act 1997||Yes|
|6.||Germany||Ordinary intangible assets||Yes||no||German Income Tax Act.||No|
|7.||India||Not defined||No||Yes||Not defined||Not defined|
India is still lagging behind in the implementation of regulations regarding taxation of cryptocurrencies. Due to its inability to bring such technology under its legal umbrella the RBI on February 1, 2017, declared that it did not give any legal recognition to such currencies and it’s clarified that any person dealing with such currencies would be doing that on his own risk. According to Ministry of State for Finance “Bitcoins, for illicit and illegal activities in anonymous/pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism laws.” government on April 2017 took a step towards legalizing these currencies or at least bringing their huge profits under the scope of I-T(Income Tax) act but could not arrive at any conclusion to date. Henceforth cryptocurrencies do not from a legal tender in India.
There has been a lot of ambiguity in determining the legal status of cryptocurrencies in India. In one aspect it is not declared illegal in India while there are no regulations issued by RBI governing such technology moreover this also raises questions on the taxability issues. It is a high time that government should at least determine the legality of such currencies so that a mechanism of taxation can be set and the high amount of gains received from such currencies can be taxed. This will also help in the economic growth of the country as well as regulate the income of citizens.
 Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCOIN.ORG 3 (2009), https://bitcoin.org/bitcoin.pdf.
Satoshi Nakamoto, Bitcoin Open Source Implementation of P2P Currency, P2P
FOUNDATION (Nov. 20, 2017), http://p2pfoundation.ning.com/forum/topics/bitcoin-opensource.
 Kevin V. Tu; Michael W. Meredith, Rethinking Virtual Currency Regulation in the Bitcoin Age, 90 Wash. L. Rev. 271, 348 (2015)
 Bhagwan Das Jain v. Union of India  128 ITR 315/5 Taxman 7
 supra 15