ALL ABOUT CRYPTO-CURRENCIES AND THEIR TAXATION THEREON:
In this article we will discuss in detail about Crypto- Currencies and their taxation.
1) What are crypto- currencies?
A Crypto- Currency is basically a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database using strong cryptography –
– to secure transaction records,
-to control the creation of additional coins,
-to verify the transfer of coin ownership.
2) How does crypto-currencies work?
-The crypto currencies basically work on block chain technology used to keep an online ledger of all the transactions that have ever been conducted thereby providing a data structure for this ledger which is secure and is shared and agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.
-Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.
3) What are salient features of crypto-currencies?
a) Decentralised – The crypto-currency transactions are processed and validated by an open and distributed network. Most of the crypto -currencies do not have a center on the networks of computers that are worldwide (nodes). These transactions are rightly verified by the network nodes through cryptography as well as recorded in a public distributed ledger known as a block chain. In fact, the transaction is rightly present across a peer-peer network and is also repeats on each and every node, thereby reaching a large percentage of nodes within seconds.
b) Irreversible – The transactions of crypto-currencies are irreversible. It is quite impossible for anyone else other than the owner of a respective private key to move digital assets and that transaction can never change after the record on a block chain. Hence, it becomes impossible to alter the transaction.
c) Anonymity – Users do not need to identify themselves while transacting in crypto currencies. Crypto-currencies features use the private key as well as a public-key system in order to authenticate all these transactions. This signifies that users may make anonymous digital identities.
d) Virtual Existence – Crypto currencies exist only online. They do not exist in physical form.
e) Instant transactions and single spending – The transactions are processed instantly and the crypto coins can be spent only once and there is no possibility of double spending the same coin.
4) What are examples of crypto-currencies?
– There are more than 5000 crypto-currencies in existence as on date. The most popular ones are:
a) Bitcoin
b) Ethereum
c) Litecoin
d) Cardano
e) Stellar
f) Chainlink
g) Tether
h) Monero
i) Dogecoin
And Many more
5) What are limitations of cryptocurrencies?
a) Cyber Security Issues – Crypto currencies though considered highly secure are subject to security breaches and there are already enough cases of such breaches costing investors hundreds of billions of dollars. For mitigating the cyber security risk continuous measures for upkeep of the security infrastructure and cyber security measures needs to be taken.
b) No regulations – The crypto-currencies are not accepted and regulated by Governments. They not have backing of the law. Hence, though the technology acts perfect it is not reliable to invest until and unless it has backing of the law.
In the words of Warren Buffet “It doesn’t make sense. This thing is not regulated. It’s not under control. It’s not under the supervision [of] any…United States Federal Reserve or any other central bank. I don’t believe in this whole thing at all. I think it’s going to implode.”
c) Lack of Inherent Value and Price Volatility – The prices of crypto-currencies are volatile and keep fluctuating. Also they do not have any backing of nay security and hence do not posses any inherent value which is a major concern.
d) Scalability – The crypto currencies are created and being adopted at a rapid pace. However, they are still not widely accepted and not used for many transactions. Hence, scalability of the crypto currencies remains an issue.
e) Anonymity risk – Due to anonymity of transactions, crypto-currencies can be used for funding illegal activities which is a serious issue and needs to be adequately addressed.
6) How is income derived from dealing in crypto-currencies?
– The prices of crypto-currencies keep fluctuating thereby creating an opportunity for trading i.e. buying and selling them at proper times to maximize gains. There are many platforms available for dealing in crypto-currencies requiring minimum capital to start trading. One can start trading vis this platforms after proper KYC verification. One needs to be cautious while choosing the platform to be used for dealing.
7) Currently what is the legality of crypto-currencies in India?
– The RBI, in 2013, tried to dissuade people from the use of crypto-currencies, cautioning them about the lack of a regulatory authority, risks of malware attacks, volatility and susceptibility to illicit use. It repeated the warnings twice in 2017, before banning it outright in April 2018. The ban was legally challenged on many counts, such as RBI’s jurisdiction.
– This ban was finally struck down by the Supreme Court in a landmark judgment (Internet and Mobile Association of India Vs RBI) of March 2020, on the grounds that it killed the business opportunities of crypto-currency exchanges, taking away their rights under the Article 19(1)(g) of the Constitution. The court also held that the RBI did not prove the harm of crypto-currencies (proportional damage) and failed to explore the alternatives to banning, such as regulation.
– In the meantime, the government came out with two legislative bills, one in 2018 and the other in the following year, but neither came to anything. And now comes the new Bill of 2021, the essence of which is the prohibition of all private crypto-currencies in India, with certain exceptions. Only the State-owned, ‘National Digital Currency’ would be valid.
8) Is income derived from dealing in Crypto-Currencies taxable?
– The charging of income tax in India is currently governed by the Income Tax Act, 1961. At present there is no certainty regarding the acceptability of crypto currencies as currencies in the country and as such no disclosure requirement is issued by Income tax department.
– The consideration of crypto currency as currency in itself would not attract any tax as neither the natural meaning nor Sec 2(24) of the IT Act includes ‘money’ or ‘currency’ as income, although it includes ‘monetary payment’.
– If crypto currency is considered as goods/property for trading, then clearly it would be either covered within the charging provision of ‘Profit and Gains from Business and Profession’ or ‘Income from Capital Gains’, depending upon its use for business/profession or not.
– If crypto-currencies are held for investments then any gains arising out of their transfer should be treated as Capital gains.
– If the Crypto Currencies are regularly traded and held as stock in trade is included within this definition, and profits realized are taxable there under as profit and gain from Business and Profession, chargeable under Sec 28 of the IT Act.
9) Is GST applicable on Crypto-Currencies?
– The treatment of crypto – currency as goods/property implies that the supply is a ‘taxable supply’ and hence subject to GST.
– According to media reports the Central Economic Intelligence Bureau (CEIB) has raised a proposal to the Central Board for Indirect Taxes and Customs (CBIC) to bring crypto-currency exchanges and platforms under the GST purview.
– As per the proposal the act of crypto-currency mining could be treated as a supply of service as it generates crypto-currency and charges transaction fees, and as such, should classify as an intangible asset and attract a GST of 18%.
Conclusions:
– Crypto-Currencies are currently trending topics in the global financial markets with potential of causing a complete disruption of how economies operate at present.
– With the great volatility and high risk of trading their growth has been able to gain attention of many speculators.
– However, currently they are in the initial stages and only after its wider acceptability for transactions would it start creating an impact on economies.
– Taxing them the right way would be a major boost for the Government revenues once they come into regular acceptance.
– For the time being the investments in crypto-currencies are based only on speculations.
(The Author is a Chartered Accountant by profession and can be reached at [email protected])
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