Crypto Currencies and their Taxation in India

A crypto currency or crypto is a collection of binary data which is designed to work as a medium of exchange. Individual coin ownership records are stored in a ledger, which is a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. Crypto currencies are generally fiat currency, as they are not backed by or convertible into a commodity. (Tag-Wikipedia)

Thus, Crypto currency is a digitized asset spread through multiple computers in a shared network. Each Crypto currency works distributed Ledger technology typically a Block Chain.

Some of the well known Crypto Currencies are

1. Bit Coin

2. Ethereum

3. Tether

4. Cardano

5. Ripple

6. USD Coins

7. Polkadot

8. Dogecoin and many more.

Crypto Currencies are generally Fiat Currency. They are open to be issues and demand and supply determine currency value. Thus the values of crypto currencies change on a daily basis.

The following table shows the value of one crypto currency in Indian Rupees and their change in transaction in 24 hrs, market cap and volume of transaction in 24 hrs. The data are as of 3^rd December 2021. This is depicted blow to have an idea of value of these currencies.

Crypto-currency Price, Market cap, Volume transacted in India as on 3^rd Dec 2021

One can see the phenomenal growth of these currencies from the above table.

Crypto has been gaining momentum in India, ever since the Supreme Court reversed banking ban on Crypto in 2020.

Investing in crypto Currency is easy, which is another reason why it had picked up. First you need to sign up for a platform and do the KYC verification. Once verification done, you transfer money from your bank account in to your wallet and buy crypto currencies.

The Crypto Currency and Regulation of official digital Currency Bill 2021, will be introduced in ongoing winter session of Parliament. This bill is different from the earlier one- “ Banning of Crypto currency and Regulation of official Digital Currency Bill 2019” The older Bill sought to impose complete ban on all crypto-related activities including mining, buying, holding, selling and dealing. Currently there are no regulations  or any ban on use of crypto currencies in India.

The crypto currency and Regulation of official digital Currency Bill 2021, seeks to prohibit all private crypto currencies in India. However it allows for certain exceptions to promote the underlying technology of crypto currency and its uses.

India has the highest number of crypto owners in the world (10.3 Cr)

The Crypto investment by Indians have touched an all time high of $ 10 billion, in Nov 2021, up from $ 923 Million in April (Source Times of India – Dated 2nd Nov 2021)

Taxation of Crypto Currency

• The Government is yet to come with a concrete solution on the taxation of Crypto Currency under Income tax act or under GST Act.
• As of date, only one country namely El Salvador, has made it a legal tender. Other countries are still evaluating the treatment of taxation (direct and indirect taxes) for transactions carried out with crypto currencies.
• In India, crypto currencies are not considered legal tender. They are considered commodities as they are tradable in the exchanges.

There are few possibilities on taxation of Crypto Currencies are discussed below

• If the Crypto-currency is held more than 36 months, then your gain will be classified as long term Capital gain Tax. And will subject to 20% plus applicable surcharges and cess, after post indexation.
• If the transaction are large and frequent it could be held that tax payer is trading in crypto currencies , so the Income from sale , say Bit coins, would be taxable as business Income.
• When Crypto Currencies are reported as “Business Income” then the implication of “Goods and Service Tax” (GST) also need to be examined.
• Government need to know how much to be levy of tax in case of GST, for transaction on Foreign Crypto Currency Exchange. For Indian Crypto Currency Exchange and Foreign Crypto-Currency Exchange the government can levy at 18% GST.
• Government is planning to compartmentalise the virtual currencies and their tax treatment on the terms of their cases- Payment, Investment or Utility.

Conclusion

• Crypto Currencies are now fast growing digital currencies.
• The Government of India has made regulations with various bills from Ban to Regularise.
• RBI, in 2018, had banned banks and other financial institutions, from facilitating transactions on Crypto-currencies.
• But in 2020, The Supreme Court of India, reversed the above order, and allowed trading of virtual currencies like Bit Coins.
• It is mandatory to disclose the amount of crypto currencies held by companies in their Balance Sheet.
• The Crypto Currency and regulations of official currency Bill 2021 has been tabled by Govermernment, and it will be raised through the winter session of Parliament,
• Currently there is no Provision for Crypto Currencies in the Income Tax Act 1961, but it would be made clear on taxation aspect, in the near future and an Act promugulating on taxation of Crypto Currencies will be coming to exist once the above bill passed in the parliament.