A cryptocurrency is digital, decentralized currencies that are issued by a private enterprise to work as a consideration of transaction between two individuals or businesses without any direct interference from the government. There are around 4000 different cryptocurrencies in the world and around 15 million people have invested $1.36 Billion in cryptocurrencies in India. Some of the renowned cryptocurrencies are bitcoins, dogecoins, Ethereum, etc.
In India, there are no specific rules or guidelines made by RBI, Central Governments, or any other financial regulatory sectors that can declare or governs cryptocurrencies in India. RBI on 6th April 2018 has put a complete ban on cryptocurrencies and has directed the financial entities not to make or accept any payment in this regard.
However on 4th, March 2020, in the case of The Internet and Mobile Association of India vs. Reserve Bank of India, the Supreme Court has removed these restrictions and held them as illegal and unenforceable. Thus it allows some sort of legitimacy to cryptocurrencies in India.
HOW DO CRYPTOCURRENCIES WORK IN INDIA
Cryptocurrencies are traded in two ways in India
1. Through Mining: This process is a sophisticated, costly, and time-consuming process where the trader earns crypto without investing money for it. They have to solve complex mathematical equations with computer programs. The first coder who cracks the codes to authorize and verifies the transaction and then adds it to the public ledger called a blockchain gets rewarded with a small amount of cryptocurrency in return.
2. Through exchanges: cryptocurrencies exchanges can be broadly divided into 3 types
(i) Centralized Exchanges: Centralized exchanges are the most highly accepted and used form of cryptocurrencies in the world that is governed directly by the central authority.
They offer higher liquidity rates and faster transactions.
(ii) Decentralized Exchanges: This mechanism is a peer-to-peer marketplace that connects sellers with buyers or investors without any interference of any intermediaries or regulations.
They provide higher security, transparency, and greater control over trading and allow privacy to its users.
(iii) Hybrid Exchange: They contain both the traits of Centralized and Decentralizes cryptocurrencies by merging the privacy and security and offers high liquidly, fast transactions and regulated frameworks.
They allow users custody of their funds even if there is an involvement of a third party.
TAXABILITY OF CRYPTOCURRENCY IN INDIA
Cryptocurrency is taxable based on their nature of investment
1. Currency: Profits from the sale of cryptocurrencies can be taxable under Business income if it is held for business purposes and is traded frequently. The profit will be held as per applicable slab rates implied as to the nature of the person.
2. Assets: Profits from the sale of cryptocurrencies will be taxable as capital gains if it is held for investment purposes. If the currencies are held for 3 years they will be treated as short-term capital gains (STCG). And if it is held for more than 3 years it will be taxed (LTCG) at the rate of 20% with indexation.
If the investors who are having an income of more than 50 lakhs per annum will have to disclose their assets and liabilities along with the cost of acquisition and quantum of currencies held by them. Additionally, the taxpayer who is Resident and ordinary resident have disclosed their foreign incomes assets in their annual returns
-Author- CA.Vinit Ugale