In the past 10-20 years, our world has changed a lot. We evolved from landlines to smartphones. We have almost shifted from money in the wallet to money in the digital wallet. Demonetization, suddenly made all the businesses be it small or big to shift to accepting online payments. From a vegetable vendor to a high-end showroom everybody will offer you to scan a code and make the payment in event of no cash or not having exact change. As payers we also feel it comfortable as we need not struggle to find exact change and always keep an eye on our wallet. In the same manner, there is one more thing that is slowly paving the path and it set to become a new sensation in the financial world is Cryptocurrency. In this read we will discuss all about cryptocurrency, i.e. aspects like the concept, types, legality and taxability etc.

What is Cryptocurrency ?

The literal meaning of cryptocurrency can be understood by dividing the terms. Crypto means encrypted key and Currency, as we all know is a source to purchase and sale of goods or services.

Crypto currency is therefore a Digital or Virtual currency which is encrypted by cryptography. It is very volatile and highly portable. Crypto currency is used synonymously with Bitcoin, but they are not same. Bitcoin is one among many other cryptocurrencies that are being traded in the market. Just like shares there are exchanges on which these are traded.

Mostly cryptocurrency works on the concept of blockchain technology. This system is decentralized and which keeps it outside the control of governments and central authorities.

How does the cryptocurrency work?

As mentioned above, cryptocurrency works on the concept of blockchain. Blockchain is a distributed ledger that is enforced by a disparate network of computers. In simple term, blockchain is where the transactions are recorded. There is no involvement of any third party.

Following chart shows that how cryptocurrency actually works-

cryptocurrency actually works

Some other points are:-

  • Wallets are available on both online and offline mode. Online wallets also known as hot wallet are based on cloud concepts, where the data is stored on a cloud online. Offline wallets also called cold wallet i.e. data is stored offline in an external storage device.
  • The wallets are protected by passcodes, i.e. private and public keys. Public key is just like a username or say mail id which can be shared with others and private key is just like password.

Types of Cryptocurrency

There are around more than 10,000 cryptocurrencies that are being traded publicly as per a market survey. The market cap of Crypto currency is more than 1trillion US $ according to a website.

The types of cryptocurrencies are majorly divided into

  • Coins- These are crypto currencies which have their own blockchain. The coins other than Bitcoin are called Altcoins.
  • Tokens- Tokens are offered through Initial Coin Offering just like IPO in stock. Cryptotokens are built on existing blockchains.

The other cryptocurrencies popularly traded are- Ethereum, Ripple, Waves, Counterparty, Bitcoin, Peercoin, Litecoin, Dogecoin, Auroracoin, Namecoin etc.

Is Cryptocurrency Legal in India?

The legality of cryptocurrency in India has always been a matter of confusion in India. In the year 2018, a circular was issued by RBI where it instructed all the financial institutions to stop providing services to business dealing in cryptocurrencies.

After that a writ petition was filed in Supreme Court of India and it ruled that the circular by RBI is not at all valid as RBI has no power to prohibit the activity of trading in virtual currencies.

As cryptocurrency is not a legal tender in India, it does not form part of even the credit system of India. So, RBI cannot regulate it as it regulates the currency in India.

From above discussion we can say that although trading in cryptocurrency is legal in India but cryptocurrency is not a legal tender in itself. That is we cannot do sale/purchase using cryptocurrency in India unlike many western countries.

Cryptocurrency: Good or Bad

Like all other things, there is good or bad about cryptocurrency as well. The features of cryptocurrency that make it a good option are-

  • It gives full freedom to do transactions i.e. there is not restriction of amount and quantity, not much involvement of merchants.
  • It is a very transparent and neutral mode of trading.
  • The cryptocurrency is very safe as it is fully encrypted.
  • It is a completely decentralized system.

There are always two sides of a coin. Main drawbacks of using cryptocurrency are-

  • Hacking- Trading in cryptocurrency is highly prone to hacking, as a hacker can make lot of money just by hacking few wallets.
  • Hidden Cost- As these cryptocurrencies are prone to exchange rate differences, the exchanges can play with the cost and thereby earning more out of an investor’s pocket.
  • There is no regulations as regards to cryptocurrency in whatsoever manner, this very attribute of cryptocurrency can lead to various frauds and scams.
  • There is so much volatility attached to it and the prices keep on fluctuating very fast.

Now, one question might arise in your mind that if there is so much money involved, than what about taxation of such income…

Do I need to pay tax on income from trading in Cryptocurrency?

Can we say that if there is no law than the income is tax-free, well it is a BIG NO. Income Tax is chargeable even on illegal incomes. So this also should be taxable. Now, let us discuss taxability of income from cryptocurrency-

Now, cryptocurrency is attained by mining or trading or for investment.

So as there is no cut and clear sections or provisions in Income Tax Act for cryptocurrency, following views can be taken on the basis of existing provisions of law-

  • If treated as Capital Gains- It will be taxed on basis of period of holding and rate as applicable for STCG (normal rate of tax on income)/LTCG (20% with indexation) can be applied.
  • If treated as business income- It will be taxed at normal rate as applicable to the assessee and expenses related to that business will be allowed.
  • If treated as income from other sources- The income can also be treated as income from other sources if it is neither investment nor business. In this case normal rates as applicable to the assesse will be applicable.

As there are no specific rules, regulations or tax provisions for cryptocurrency, it is better to get in touch with your tax consultant to choose the best applicable taxation option for you.

Conclusion

So in this article we discussed various aspects of cryptocurrency. Mainly we understood what cryptocurrency is and how it works. The main aim of this article was to make our readers know about the concept of cryptocurrency. Trading in cryptocurrency can be risky as well as rewarding. The choice to trade and the quantum one wants to trade depends on their choice and risk taking ability and experience. Given the market cap of cryptocurrency in the world economy there is no doubt to the fact that it can be surely the “NEXT BIG THING”. Since its launch it has already come a long way. Government is working on bringing the rules and regulations on trading of cryptocurrency already. Its increasing popularity is definitely something which makes it something worth to watch out.

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