Introduction
Cryptocurrency refers to any digital currency which exists virtually or digitally and uses cryptography for transactions. Cryptocurrencies do not have a specific central issuing or regulating authority, instead it uses a decentralized system to record transactions and issue new units. The examples of cryptocurrencies include Bitcoin, Ethereum, Litecoin, Dogecoin etc.
Cryptocurrencies can either be mined (i.e. the process of verification and addition to the transactions to the blockchain of cryptocurrency) or it can be traded between two persons, just like trading of shares and commodities.
Different countries are of different views regarding their stance on treating cryptocurrency as currency or an asset differs and so does the tax implications.
The Taxation Structure of India and system of Set-Off of incomes.
Income Tax Act, 1961. gives an inclusive definition of the term ‘income’, the statute provides for an inclusive definition as it aims to widen the ambit of collecting tax from an assessee. The Income Tax Act, 1961 also exempts certain income, but such an income should be explicitly exempted only then it will be considered as one, otherwise it will fall under any of the heads of income and an assessee will be liable to pay tax for the same. For example-income from agriculture is explicitly exempted by the Income Tax Act and income from illegal activities like dealing in narcotics is not. [2]
Before, the Finance Bill, 2022, the income earned from cryptocurrencies was taxable either under the head of ‘Income from Capital Gains’ or Income from Other Sources’ for a person who was dealing in cryptocurrency for the purpose of investment and under the head of ‘Income from Business/Profession’ for a person who was engaged in the trading of the same.
Setting off of income refers to the net adjustments made among the various heads of income under the Income Tax Act, 1961 while computing the income of an assessee. Set off can be availed either between inter-heads of income (i.e. between different heads) and intra-head (i.e. within the same head). For example, Loss in the head; Income from House Property’ can be set off against the head ‘Income from Other Sources’ and Long Term Capital Loss which falls under the head ‘Income from Capital Gain’ can be set-off only against Long Term Capital Gain.
Hon’ble Union Finance Minister Smt. Nirmala Sitharaman announced while reading out the proposals of Union Budget 2022-23 in the Parliament that the government proposes to tax the gains made on ‘Virtual Digital Assets’ at the rate of 30 percent of the net gain so made plus the cess and a surcharge for a threshold amount. She also further proposed that inter-person transactions made on such assets shall be subjected to TDS (Tax Deducted at Source) at the rate of 1 percent above the threshold limit which would be announced by the government. It was also announced that the loss from Virtual Digital Assets cannot be set off against any other income, which means if an assessee has a loss from a particular virtual digital asset, the assessee cannot set it off against any other gain from any other income. Further, the individual will not be able to carry forward the losses from virtual digital assets to subsequent financial years. A separate ITR (Income Tax Return) column for the disclosure of the virtual digital assets from the next financial year was also announced
The Government of India defined the term ‘Virtual Digital Asset’ as “any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise.” It also includes Non-Fungible Tokens and “any other digital asset, as the Central Government may, by notification in the Official Gazette specify:” Therefore, bringing the cryptocurrencies within the meaning of virtual digital assets and making it taxable at the rate of 30 percent plus cess and surcharge and TDS at rate of 1 percent for inter-person transactions.
The Finance Bill 2022 also proposed a 1 per cent TDS on payments towards virtual currencies beyond Rs 10,000 in a year and taxation of such gifts in the hands of the recipient. The threshold limit for TDS would be Rs 50,000 a year for specified persons, which include individuals and Hindu Undivided Families (HUF) who are required to get their accounts audited under the Income Tax Act.
The provisions relating to 1 per cent TDS will come into effect from July 1, 2022, while the gains will be taxed from April 1.
Does taxing any commodity/asset means that it is considered legal?
Many in India are of the belief that since cryptocurrencies have been brought under the ambit of Income Tax Act, it also means that it is now considered legal. However, the reality is completely opposite, Income Tax Act is a taxing statute and it only deals with the income of a person, regardless of the fact if it has been earned by legal means or illegal means. It has been decided by various High Courts and even by Hon’ble Supreme Court of India in plethora of cases that even if the nature of business or the means to earn income is illegal, yet it will be taxable under the Income Tax Act, 1961. Therefore, just because the gains from cryptocurrency is subjected to tax, it does not mean that it is either legal or otherwise.
Conclusion
The nebulosity whether cryptocurrency is legal or not is yet to be clarified by the government. However, one thing which can be observed is that the government has not accepted cryptocurrency as a currency or a mode of exchange yet it has considered it as an asset for the purpose of bringing it into the meaning of virtual digital asset. No set-off and carry forward of the loss recorded for such asset and a TDS rate to trace the transactions of cryptocurrency and other digital assets implies that government is uncertain about the same and wants to come out with its own digital currency backed by Reserve Bank of India as stated by Union Finance Minister during her Budget speech.
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