1. What is Crypto currency?
Cryptocurrencies are a type of digital money. The First cryptocurrency was Bitcoin but since its release in 2009, there are now a proliferation of different types. Cryptocurrencies can be bought or sold with other currencies, used to purchase goods from sellers who are willing to accept cryptocurrencies as payment, make investments in various assets and are being retained as investments themselves. Given the unique proprietary features of Bitcoin, there appears to be a degree of uncertainty and ambiguity as to whether Bitcoin and other similar cryptocurrencies would, legally, qualify as property for law purposes. However, the better view appears to be that the courts would recognise the ownership rights which a person has in Bitcoin, despite any formal difficulties in the application of traditional features of law.
2. What is NFT?
A non-fungible token (NFT) is a unit of data stored on a digital ledger(block chain), that certifies a digital asset to be unique and therefore not interchangeable. Digital assets can be such as photos, videos, audio, and any other type of digital files.
A NFT is a proof of ownership that is separate from a copyright, when a NFT representing an art is sold it doesn’t mean the original owner cannot make another copy of the same.
NFTs of artwork are similar to autographed items, The unique Identity and ownership of an NFT is verifiable via Blockchain ledger.
Some example of this :
1. A 3D-rendered model of a home named “Mars House” , created by artist Krista Kim was sold as a piece of digital real estate on the NFT market for over US$500,000.
2. ‘Disaster Girl’ Zoe Roth, famous as the little girl smiling while a house burns in a popular Internet meme, has made almost $500,000 (roughly Rs. 3.7 crores) by selling a original copy of the meme as a non-fungible token (NFT)
3. In February 2021, Axie Infinity recorded a sale of $1.5 million for digital land titles in a single sale via NFT.
4. Digital artwork entitled “Everydays – The First 5000 Days” , by artist Mike Winkelmann, also known as Beeple, sold for US$69.3 million in 2021 to Vignesh Sundaresan
The NFT market has seen rapid growth recently with its value tripling to $250 million in 2020. In the first three months of 2021 alone, more than $200 million were spent on NFTs. The economic momentum NFTs have in the cryptomarket has exploded because of a trend towards digital collectibles. NFTs are also accelerating a larger trend of digital economic innovation as the public is increasingly favoring a crypto-economy.
3. What is the technology that supports this ?
The technology which allows cryptocurrencies and NFT to work is known as “blockchain technology”. The blockchain is a database containing evidence of transactions between dierent users. Multiple networked computers hold all or part of a sequence of information, which is arranged into “blocks”. The information is sequenced in chronological order and added to the blockchain by the network without reference to users’ identities or personal details. The updated blockchain is then saved so rapidly across the network that it is almost impossible for a hacker to change the information contained on every single computer on the network in order to manipulate a transaction (assuming there are no vulnerabilities in the software). This eectively means that once a transaction has been recorded, it cannot be edited or deleted. It therefore acts as a distributed digital ledger which is secure and usually anonymous.
4. What is legality of this type of transaction?
Accordingly, any transaction involving cryptocurrency can be analyzed from two viewpoints – income and expenditure. The nature of the transaction nature and parties to the transaction would decide if it may be taxable under the Income Tax Act, 1961, or Central Goods and Services Tax Act, 2017, and other laws.
As it is well established that the regulatory framework regarding cryptocurrencies is uncertain, this article tries to analyze the taxation (or non-taxation) by considering them as both goods and currency, two major approaches currently prevalent across the world.
5. What is Taxablity on View point of Income Tax?
The treatment of cryptocurrencies under the direct tax regime is mainly governed by the Income Tax Act in India. In the current legal landscape, there is no certainty regarding the taxation of cryptocurrency nor ant disclosure requirement about the income earned issued by the Income Tax Department.
Moving on, if cryptocurrency is considered as ‘currency’, it would not be susceptible to tax under the IT Act. The first reason being, under the Act, the definition of ‘income’ is an inclusive one, which comprises not only the ‘natural’ meaning but also the items mentioned under Sec 2(24) of the IT Act. But neither the natural meaning nor Sec 2(24) of the IT Act includes ‘money’ or ‘currency’ as income, although it includes ‘monetary payment’. Secondly, being a mode of consideration, the tax incidence would be on the transaction and not on the currency. On the other hand, if cryptocurrency is considered as goods/property, then clearly it would be either covered within the charging provision of ‘Profit and Gains from Business and Profession’ or ‘Income from Capital Gains’, depending upon its use for business/profession or not. It would not be out of place to state that the ambit of the word ‘income’ is not restricted to the words ‘profits’ and ‘gains’ and anything which can appropriately be designated as ‘income’ is liable to be taxed under the IT Act, unless expressly exempted.
Sec 2(14) of the IT Act defines a capital asset as “property of any kind held by the assessee whether or not connected with his business or profession”. This definition of ‘capital asset’ provided is widest in itself and covers all kinds of property except those expressly excluded under the Act.Therefore, any gains arising out of the transfer of cryptocurrency must be considered as capital gains, if they are held for investment.
The tax treatment of cryptocurrencies when held as ‘stock in trade’ is not the one which faces major difficulties as the issues arising while treating it as capital gains do not arise when such cryptocurrencies are held in furtherance of business activity. Under Sec 2(13) of the IT Act, the definition of ‘business’ is inclusive, and comprises of “trade, commerce or manufacture or any adventure or concern of such nature.” Moreover, any continuous activity like trade in cryptocurrencies is included within this definition, and profits realized are taxable thereunder, chargeable under Sec 28 of the IT Act.
The profits may not necessarily be in the form of money, they are taxable even if they are ‘in-kind’. Any expenditure incurred for this purpose, such as the purchase of computing power as a capital asset, should be allowable as a deduction per the provisions specified in Sec 30 to Sec 43D of the IT Act.
6. Taxablity on viewpoint of GST?
The treatment of cryptocurrency as goods/property implies that the supply of bitcoins is a ‘taxable supply’ and hence subject to GST. Technically, a supply of cryptocurrency as goods or property in exchange for other virtual/real goods should fall within the ambit of ‘barter transaction’ since bartering is simply an exchange of one good for another.
Even in its most innovative form, any barter transaction has two essentials –
1. direct exchange of goods or services for other goods/services and
2. no use of money.
Before GST, under the various state VAT laws, the incidence of tax arose when there was a sale of goods in exchange for cash, deferred payment, or any other valuable consideration. The expression ‘any other valuable consideration’ leaves out a wide scope of ambiguity, since the term should typically derive reference, ejusdem generis, from its preceding terms (i.e. cash and deferred payment), and therefore, must not include an exchange of goods for other goods. This view was reiterated by the Supreme Court in the case of Sales Tax Commissioner v. Ram Kumar Agarwal, where a transaction of gold bullions in exchange for ornaments was excluded from the definition of sale under Sec 2(h) of the Sale of Goods Act, 1930. However, the position is similar to when a transaction is used as a device to conceal monetary consideration, courts may unravel the device to include it within the ambit of sale.
An approach where cryptocurrencies are considered as goods means that some transactions would be taxed twice – at first on supply (otherwise exempted for a transaction in money) and secondly on consideration, unnecessarily leading to higher tax. This higher incidence of taxation puts the businesses operating in cryptocurrencies at a huge disadvantage which also diminishes their purchasing capacity. The issue gets further complicated in cases of international transactions.
7. What is current clarity on this in Indian laws?
Recently the Central Economic Intelligence Bureau (CEIB), proposed to impose 18% GST on Bitcoin transactions. The CEIB told CBIC that Government could potentially gain ₹ 7,200 crores annually on bitcoin trading. CEIB has also suggested that Bitcoin be categorized as an ‘intangible assets’ by which GST could be imposed on all the transactions. It was also added that cryptocurrency could be treated as currents assets and GST be charged on the margins made when traded.
Cryptocurrency `mining’ will be treated as a supply of service since it generates cryptocurrency and involves rewards and transaction fees. Tax will be collected from the miner on transaction fees or reward. If the value of the reward exceeds ₹ 20 lakh, individual miners will need to register themselves under the Goods and Services Tax (GST).
Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was proposed to be introduced in the Budget Session of 2021, but that did not happen. This Bill had a 2018 and 2019 versions which could not make it to Parliament.
Some of these proposals do not seem to be in sync with the global best practices and would create mismatch in interpretation.
The crypto in today’s scenario has the potential to boost the backbone of India’s digital infrastructure and also securing all the transactions made on the digital network. In this situation levying taxes on the transactions involving cryptocurrency should be considered a welcoming move and should not be seen as a restriction. It is a two way street for the crypto transactions to be traced and used legally as well as generating income for the government to be used efficiently. It is also vehemently asserted that employing tax on crypto as a policy matter can help to provide an ideal atmosphere to assure the traders that their money is safe and the risks involved in trading are also mitigated.
India should bring more clarity like in Australia and UK, clear and progressive guidelines should be issued soon in India (as well as in general vis a vis various other aspects of Blockchain Assets) so that India ,becomes well-placed to ride the ‘cryptocurrency wave’ in the coming days.