Tax Implications of Transactions in Crypto Currency Under Income Tax Act, 1961

MASD & Co. 20 Mar 2021 14,181 Views 1 comment Print Income Tax | Articles

What is crypto currency?

Crypto currency is a type of currency which uses digital files as money. Usually, the files are created using the same methods as cryptography – the science of encrypting information. It is claimed to be more secure than the real money.

How is crypto currency acquired or generated?

How is crypto currency acquired or generated

Is Crypto currency taxed in India?

Concept of crypto currency is very new to the Indian market. Apparently, the government is yet to come up with the explicit provisions for taxability of income from transactions in crypto currencies under the Act. But regardless of the same, levy of tax on crypto currency cannot be skipped only because of the form of income in which it is received, as the purpose of income tax laws have always been to bring out possibilities to levy tax on income irrespective of its form. Therefore, the probability of tax on crypto currency can be looked upon under different heads of income by following the elimination method:

Is Crypto currency taxed in India

The outcome of the above elimination is that as of now under the Act, Income arrived from crypto currency can be taxed either under the head of Profits and Gains from Business or Profession or Income from Other Sources.

Let us understand the taxability of these transactions under the above heads of income as per the Act:

Profits and Gains from Business or Profession

Crypto Currency received as consideration for sale of goods or supply of services:

When crypto currency is received as consideration for sale of goods or services, it is equivalent to receipt of money from debtors in non-convertible foreign currency.
Accordingly, any kind of fluctuations between the amount of receipt and the amount of invoice would give rise to foreign exchange gain/loss as the case may be.
Consequently this foreign exchange gain / loss will form part of the profit and loss account and eventually become part of the income offered under this head.

Selling & purchasing of crypto currency as stock-in-trade:

In the case, cryptocurrency is held as stock-in-trade, the income arising out of trading in cryptocurrency will be considered as income from business, and will be offered under the head “Profits and Gains from business or profession”.
As trading in cryptocurrency is not defined as “specualtive transaction” under Income Tax Act, 1961, the same may be considered as a Non-specualtive business.
Accordingly, it may be an eligible business under the presumptive taxation scheme, wherein deemed profits from business at the rate of 6% of the Turnover may be offered for tax.

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Income from Other Sources

Generation of crypto currency through Mining:

Cryptocurrency generated by mining may not be considered as self-generated assets. The reason being there is an indirect cost invloved in the form of cost of setting up computers and other processing equipments.
Moreover, as per the provisions of Income Tax Act, 1961 cryptocurrency is not a defined “Capital assets”. Hence, no capital gains tax would arise on sale of cryptocurrency acquired through mining.
As a result, capital gains would not apply at all.
Accordingly, the income tax authorities may tax income from cryptocurrency earned through mining under the head “Income from other sources”.

Receiving Crypto currency in the form of Gift:

Generally, gift received are taxed under the head “Income from other sources”. This means they are taxed at individual slab-rate. Consequently, cryptocurrency received as gift will be taxed under “Income from other sources” at slab-rate
Under the provisions of gift, any sum received as gift of Rs. 50,000 and above are entirely taxable. As a result, cryptocurrency received as gift of worth Rs. 50,000 and above shall be entirely taxable.
Also, the exemptions from tax on gifts received may apply on cryptocurrency as well. Some of the exemptions are gift received:-

1. From relatives
2. On the ocassion of marriage
3. Under a will or by way of inheritance

Income from Other Sources

Dealing in crypto currency solely for the purpose of investment:

When one hears the word “Investment”, the notion is that the profit on Investments will be taxed under the head of income “Capital Gain”. But for this, the particular investment should be defined as a “capital asset” under the Act. If the government comes up with an amendment defining cryptocurrency as capital asset, it may be taxed as follows:-

Particulars	Type of Gain	Rate of Tax
Holding > 36 months	LTCG	Flat 20%
Holding < 36 months	STCG	At slab-rate

On the contrary, if IT authorities do not consider cryptocurrency as a capital asset, the provisions of capital gains will not come into the picture at all. Accordingly, it will have to be taxed under “Income from other sources” being the residual head of income.
Under the head “Income from other sources”, the tax would be charged at individual slab rate only on the profit and not on sale value, as full purchase value of cryptocurrency can be claimed as a deduction under Section 57 of the Act.

Conclusion:

Even if there is not explicit mention of crypto currency in the Indian statutory laws which deals with taxation of income and other transactions of buying and selling, the current ambit of the Act covers almost all the scenarios. Also there may be various other scenarios in which crypto currency may come into picture but the taxability of the same would be solely dependent on future legalisation and the stand of Reserve Bank of India with respect to crypto currency.

(This article represents the views of the authors only and does not intent to give any kind of legal opinion on any matter)

Authors:

Vishal Kothari | Director | E-mail: vishal.kothari@masd.co.in

Rishabh Jain | Associate Consultant | E-mail: rishabh.jain@masd.co.in

Ashish Raithatha | Associate Consultant | E-mail: ashish.raithatha@masd.co.in