Introduction
Cryptocurrency has the ability to improve the financial standing of companies and service providers since it is an innovative method of payment that is also very efficient and appealing. It provides an alternative payment method, which makes it easier to conduct transactions such as buying, selling, transferring, and exchanging. Cryptocurrency platforms do not have the required amount of monitoring and regulation, despite the fact that they provide a broad range of digital financial transactions, introduce a new form of money with unique procedures and methods, and provide a wide variety of digital financial activities.
How tax provision on Income from Virtual Digital Assets (VDAs) Works?
As part of the Finance Act 2022, a new provision was added to the Income-tax Act of 1961. The newly inserted clause is as follows:
“131. There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent. No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Further, loss from transfer of virtual digital asset cannot be set off against any other income. Further, in order to capture the transaction details, I also propose to provide for TDS on payment made in relation to transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold. Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient.”[1]
This section allows a taxpayer to deduct one percent of any money paid to a resident for the transfer of virtual digital assets. The clause was included in the Income-tax Act of 1961. (VDAs). The amount of tax that a resident is expected to pay must now be withheld either at the time that the money is credited to their account or at the time that they are paid, whichever occurs first.
Additionally, it is proposed to amend the Explanation to Clause (x) of Section 56(2) of the Act[2] in order to, among other things, provide that for the purpose of the said clause, the expression “property” shall have the meaning assigned to it in Explanation to Clause (vii) and shall include “virtual digital asset”. This amendment is considered essential in order to facilitate the collection of taxes on the donation of virtual and digital assets. Hence, it can be observed that the Finance Act, 2022 has made an attempt to include provisions for taxation of cryptocurrencies from various sources.
Cryptocurrency Tax Rules In India
Mining cryptocurrency is one way to obtain it in India; another option is to purchase it on a cryptocurrency exchange. The gains made in this manner may be subject to taxation under either the Income Tax Act of 1961 or the Central Goods and Services Tax Act, depending on the particulars of the transaction and the parties involved. Both of these pieces of legislation were passed in 1961. The uncertainty in India regarding whether or not cryptocurrency ought to be taxed as a commodity or as currency contributes to the complexity of the taxation process for virtual currencies.
When it comes to determining whether cryptocurrency should be taxed as a good or a service, the decision can be difficult. user of cryptocurrency shall be considered a taxable supply of service under GST, where the miner shall be considered the service provider, the user shall be considered the recipient of the service, and the computing power supplied in exchange for the bitcoins shall be considered the service.
As a consequence of this double taxation, Assessee who are also business owners would be required to pay a greater total amount of taxes. Additionally, it makes people less likely to put their money into cryptocurrency. The Income Tax Act, which is India’s primary legislation governing direct taxation, includes provisions for the taxation of cryptocurrencies as taxable income. Bitcoins would be subject to taxation under the Income Tax Act (ITA), despite the fact that money and other forms of currency are not specifically mentioned in the definition of “income” under section 2(24), which is the ordinary meaning of the word “income.” Additionally, according to the Income Tax Act, the taxable aspect of a monetary transaction is the transaction itself, not the currency itself. In the event that cryptocurrency is subject to taxation under the heading of capital gains, then it will be taxed in accordance with Section 45 of the Income Tax Act. However, there needs to be an acquisition cost in order to tax it under this particular heading. Gain on an asset can’t be taxed if it can’t be determined whether or not it was earned. The Supreme Court reached the same conclusion in its opinion regarding the case of CIT v. B.C. Srinvasa Setty[3]. In cryptocurrency, since the currency is generated by the individual itself, there might be no cost of acquisition at all which creates an issue while taxing it.
In contrast, Countries like the United States tax cryptocurrency gains at the time of transfer since they regard them as property. The exchange price of the cryptocurrency at the time of the completed transaction is the fair value for purposes of calculating such gains.
However, in the Union budget of 2022, the Finance Minister had announced a tax of 30% on cryptocurrency, non-fungible tokens (NFTs) and other virtual digital assets irrespective of the type of income. Further, no deduction except for the cost of acquisition would be granted. Not only that, an additional 1% would be levied in the instance of a transaction exceeding INR 10,000. Except for cryptocurrency transfer by way of gift or rewards, no other form of cryptocurrency transfer would be exempted from the tax regime.[4]
It was clarified what will be exempted from taxation under the Virtual Digital Assets in a circular that was released by the Central board of Direct Taxes. This does not include cryptocurrencies, which means that it is possible for cryptocurrencies to be taxed under this category as they are not included. To further add to the confusion, the Income Tax Act mandates that 1% of the consideration paid for a resident’s transfer of a VDA must be withheld at source as income tax. This requirement is in place to comply with the income tax withholding requirements of the Act. According to subsection 194S of the Income Tax Act, a one percent (1%) withholding tax must be applied to the consideration regardless of how it was paid for: entirely in cash, partially in cash and partially in consideration for another variable deduction arrangement, or entirely in consideration for another variable deduction arrangement.
Nevertheless, the TDS will only be applicable in the event that the total amount of the transaction is greater than the threshold that has been specified for exemption from the TDS. It is possible to go over the limit in a single transaction or spread it out over a number of separate transactions.
Key Concerns With Tax On Cryptocurrencies in India
i. High rates of taxation
The high rates of 30% total tax liability will discourage potential investors. The general population has the belief that increased taxes would cause the industry to go elsewhere. Some people are concerned that a high tax rate might encourage corporations to conceal their operations and move to countries with less stringent regulations in order to stay competitive. This may have a domino effect, leading to a rise in the volume of trading on Indian exchanges and a higher movement of capital to foreign markets.
ii. Deduction of losses, carry forward and set off not allowed
Trading profits in cryptocurrencies are subject to taxation at a rate of thirty percent, but trading losses cannot be deducted and cannot be carried forward. The cryptocurrency market is subject to bull and bear cycles in much the same way that any other market or asset would be. It is conceivable for a trader to suffer losses during a bear market and then recoup those losses during a future bull run in the market. If losses could be carried forward, it may make the investors’ tax burden a little bit easier to bear. Losses incurred from trading cryptocurrencies ought to have been handled in the same manner as those incurred from trading stocks, which the government currently enables
iii. Vague definition of ‘virtual digital assets’ and inconsistent application of provisions
Because the definition of VDAs proposed in the Finance Bill, there is a great deal of ambiguity. It is also important to take into consideration concepts such as staking, forking, payment for goods and services using cryptocurrency, as well as P2P transactions using cryptocurrency. Within the framework of the budget, cryptocurrencies are categorized as “assets,” despite the fact that their management is distinct from that of regular assets. The evidently biased handling of cryptocurrencies in the upcoming budget might have significant repercussions for the industry as a whole.
International Practices
USA
Since bitcoin is considered a capital asset by the Internal Revenue Service, any profits made from selling bitcoin in the United States are subject to taxation. If a user keeps onto a security for more than a year, then they will be liable to long-term capital gains tax, but if they stay onto it for less than a year, they will be subjected to short-term capital gains tax.
If one buys cryptocurrencies instead of traditional currency, they won’t have to worry about paying any taxes. If a bitcoin investor can keep their assets secret and out of the public eye, they may avoid paying taxes on their profits forever. A user won’t be obligated to pay taxes on any earnings they make with bitcoin until they sell them or swap them for anything else.
If one sells their Bitcoins within a year after purchasing them, their capital gains tax might range anywhere from 0% to 37%. If the bitcoin was kept for more than a year, the tax rate reduces dramatically to zero percent, fifteen percent, or even twenty percent, depending on the taxpayer or couple’s income.[5] If the bitcoin was stored for more than a year, the tax rate is zero percent.
Canada
In contrast to conventional currencies, bitcoin and other cryptocurrencies are not recognized as legal tender in Canada. Instead, it is dealt with as a capital asset in the same manner as stocks and real estate. The whole profit made from the sale of cryptocurrencies would be subject to income tax, which would need to be paid. If the profits from one’s bitcoin transaction are subject to capital gains tax, they will only be obliged to pay CGT on half of those earnings. This is the case only if the proceeds from the cryptocurrency transaction are subject to capital gains tax.
The effective rate of income tax will range from 15% to 33%, depending on the income category a person may fall into.[6] It is important that a user must be aware that the Canada Revenue Agency (CRA) may keep an eye on the bitcoin holdings they may have. The Canada Revenue Agency (CRA) has recently announced that they would be working together with bitcoin exchanges to share customer information. This information is being used to maintain tabs on investors in cryptocurrencies in Canada and ensure that they are reporting and paying taxes on their holdings in an appropriate manner.
United Kingdom
In the United Kingdom, Bitcoin and other cryptocurrencies are exempt from any kind of tax. Instead, a user may have to pay Capital Gains Tax or Income Tax on the value of their crypto holdings. One’s tax liability in crypto will be determined by the nature of the coin trades they make. A user must pay Income Tax if they have any taxable income. Capital Gains Tax is levied if it is determined that the user has made a profit on an investment.
In contrast to many other nations, the United Kingdom does not have a separate Capital Gains Tax rate for short-term and long-term investments.[7] Capital gains are taxed at the same rates regardless of their source. A user have to pay a certain percentage of your capital gains as tax. Depending on the tax bracket an assessee may fall into, they may owe 10% or 20% tax on their cryptocurrency earnings. Obviously, this is dependent on the total taxable income, the magnitude of the profit, and the deductions that have been made.
A study of the system of taxation on these countries reflect a strict approach taken towards cryptocurrencies, wherein they are either not accepted as legal tender, or high rates of taxation are imposed on the same. This in turn affects the amount of investment made in these assets. However, there are certain other jurisdictions which take a more lenient approach. As a result, investors are attracted towards investing in these countries and these legislations house several cryptocurrencies and blockchain start-ups and investment.
Germany
Because bitcoin is regarded more as a personal property than as real estate in Germany, the value of cryptocurrency is subject to personal income tax rather than the tax on the appreciation of assets, which is known as capital gains tax. The most important thing to keep in mind is that digital money is only liable to taxes in Germany if it is sold during the same calendar year that it was purchased.
In light of this, while Germany does tax specific activities linked to cryptocurrencies, such as short-term transactions, mining, and staking, the country’s regulations regarding the taxation of cryptocurrencies are far more permissive when compared to those of other countries. Because it is regarded to be “other assets,” the sale of cryptocurrencies is referred to as a “private disposal” in Germany. This distinction is essential since the private sale of assets in Germany continues to enjoy favorable tax treatment.[8]
In Germany, gains made through the sale of a cryptocurrency that was kept for more than a year are exempt from taxes since they are considered to be the result of a “private transaction.” Additionally, earnings of up to $600 made annually from the sale of bitcoin are not subject to taxes under any circumstances.
Switzerland
Due to the fact that the Federal Tax Administration (FTA) does not see cryptocurrencies as being comparable to the Swiss Franc, cryptocurrencies are not acknowledged as legitimate forms of payment in Switzerland. They classify cryptocurrencies as an asset because, contrary to popular belief, they consider it to be a kind of investment comparable to stocks or bonds (more precisely, a crypto-based asset or a private wealth asset).
Individual Swiss investors, as opposed to public enterprises, are exempt from paying capital gains tax on any profits made from the sale of their shares. People who operate their businesses either as sole proprietors or via corporations, are the only ones who are required to pay capital gains tax. The value of their bitcoin assets must still be reported and taxed.
Transactions using cryptocurrencies may still be subject to the Income Tax as well as the Wealth Tax in certain circumstances. Individuals whose bitcoin holdings fulfill the following requirements will not be taxed on their assets:
- If their yearly net capital gain is less than fifty percent of your annual income, and they do not have any other sources of income, they will not be required to pay income tax to the federal government.
- Their trading turnover is less than five times their holdings at the beginning of the financial year.
- They have held onto their cryptocurrency for a minimum of six months
- They solely use derivatives for the purpose of risk management, and they do not depend on debt financing in any way.[9]
In addition to this, Switzerland’s singular system of regions divided into cantons has a significant effect in regulating the scope of activities that are permissible and those that are not. The 26 different cantons that make up Switzerland each have their own legal definition of cryptocurrency and approach to managing it.
Conclusion
One of the most significant issues with the systems that operate cryptocurrencies in India is that they are not governed by any one centralized body. Therefore, it is necessary to carry out more study in order to have a complete understanding of the implications of the existing legal framework for the deployment of cryptocurrency platforms as well as the real financial laws that regulate the financial industry. As observed in the case of several international legislations, lenient tax regulations have helped boost investments and also helped improve the economy of the country. On the other hand, stricter tax regulations in certain other jurisdictions have helped to maintain a level of transparency in cryptocurrency transactions which is essential to avoid any tax evasions and protect the country’s economy. Hence, India needs to adopt a balanced approach towards building a tax regime for cryptocurrency which will sit the economic environment and needs of the Indian investors. Thus, the challenges discussed above need to be considered along with the kind of direct and indirect tax regimes existing in the country to amend existing tax regulations and introduce new rules in future.
Notes:-
[1] Budget 2022-2023, Speech pf Nirmala Sitharaman, Minister of Finance, § 131.
[2] Income Tax Act, 1961, § 56(2), No. 43, Acts of Parliament, 1961 (India).
[3] CIT v. B.C. Srinvasa Setty, 1981 2 SCC 460
[4] https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwi2r-jZj5P9AhUjSmwGHYt8AHgQFnoECCkQAQ&url=https%3A%2F%2Fwww.idfcfirstbank.com%2Ffinfirst-blogs%2Ffinance%2Fhow-crypto-currency-will-be-taxed-in-india&usg=AOvVaw2vFnQvkmYaeufsf2Y9mIZB
[5] Yereli, A.B. and ORKUNOĞLU-ŞAHİN, I.F., Cryptocurrencies and Taxation, 25 In Proceedings of the 5th International Annual Meeting of Sosyoekonomi Society, p.27 (2018)
[6] Nevle, E., Tales from the Crypt: Global trends in the taxation of cryptocurrency, 24 Currents: J. Int’l Econ. L., p.116 (2020).
[7] Panova, О.О., Leheza, Y.О., Ivanytsia, A.V., Marchenko, V.V. and Oliukha, V.G., International models of legal regulation and ethics of cryptocurrency use: Country review (2019), http://dspace.hnpu.edu.ua/handle/123456789/2930.
[8] Solodan, K., Legal regulation of cryptocurrency taxation in European countries, 6 Eur. JL & Pub. Admin., p.64 (2019).
[9] Yalaman, G.Ö. and Yıldırım, H., Cryptocurrency and tax regulation: Global challenges for tax administration, In Blockchain economics and financial market innovation, Springer, Cham, pp. 407-422 (2019).
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Article is authored by Anuradha Garg and Ananya Mohapatra, who are IV year students at Gujarat National Law University, Gandhinagar.
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