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A Study On Crypto-Currencies And Crypto Taxation In India

Investing in cryptocurrency is currently the hottest trend in the investment market globally. As they are decentralized, they are not controlled by the government or any other financial market.

According to the provisions of The Income tax act 1961, cryptocurrency is defined as:
  • 'A form of Virtual Digital Asset (VDA)
  • Not an Indian currency or foreign currency according to the Foreign Exchange Management Act, 1999
  • Functions as a store of value or a unit of account
  • Can be stored, transferred or traded electronically.

The Cryptocurrency Bill, 2019 defined cryptocurrency as 'any information, code, number or token generated through cryptographic means or otherwise, providing a digital representation of value, or functioning as a store of value in a financial transaction.'

  • In 2013, RBI issued a circular warning about the risks about cryptocurrencies to its investors.
  • The rise of digital payments helped the crypto industry flourish.
  • In 2017, two writ petitions seeking to ban and regulate cryptocurrencies were filed. The government then introduced a regulatory body to further investigate cryptocurrencies.
  • The RBI issued a circular restricting any kind of interaction with crypto exchanges in 2018 which led to multiple petitions from people hoping to reverse the ban.
  • In 2019, The Cryptocurrencies Bill was passed which prohibited the usage of cryptocurrencies, and made transferring, selling, holding, mining, or use of cryptocurrencies in the territory of India as an offence punishable with an imprisonment up to a period of ten years or fine or both. But this did not get any legal enforceability.
  • In 2020, the supreme court held that the order passed by RBI without any regulations is unconstitutional. The crypto boom of 2020 was the much-needed break this industry needed.
  • In 2021, the Lok Sabha intended to introduce the Cryptocurrency and regulation of official digital currency bill, or the Cryptocurrency Bill, 2021 for deliberations. It aims to provide a framework for the official digital currency to be issued by the RBI and to ban all the private currencies which can be defined as the ones that are not issued or recognized by the RBI.

The judgement provided in The Internet and Mobile Association of India vs Reserve Bank of India:
The stance taken by the petitioners in this case is that the cryptocurrencies have the potential to improve the efficiency and inclusiveness of the financial system of India. They contended that the crypto assets did not pose risks to the global financial stability as their combined market value even at their peak, comprises lesser than 1% of the global GDP.

The advantages of digital currency are:
  1. Control and security,
  2. Transparency,
  3. Very low transaction cost.

The disadvantages indicated were risk and volatility. In the Financial Stability report of June 2013, RBI took note of the technological risks imposed by virtual currencies in the form of regulatory, operational and legal risks. People dealing with crypto currencies have been repeatedly warned about lack of consumer protection, market integrity, money laundering etc. Due to these risks and increase in terrorist financing using the transfer of VDAs,

RBI exercised its power under Section 35A, 36(1)(a), and 56 of the Banking Regulation Act, 1949, section 45J(A), 45L of the Reserve Bank of India act, 1934 and Settlement Systems Act, 2007 and directed the entities to not deal with VCs or provide services for facilitating any person or entity in dealing with or settling VCs and to end relationship with such individuals or entities.

At present, the supreme court left crypto currencies in a regulatory limbo and didn't take a clear stance on whether it is legal or illegal. The NFTs also face the same uncertain legal existence. Just because cryptocurrencies are now taxed does not mean that they are now legal. As Income tax act is only a taxing statute it only taxes income regardless of the means through which it is earned. So only the gains earned through cryptocurrency is taxed and the legality is still a question mark.

Cryptocurrency and Income tax:
While the government continues to take a clear stance regarding the legality of the crypto currencies, it has implemented a new tax regime aimed at taxing gains, and, or, income from virtual digital assets (VDAs) i.e., crypto currencies, NFTs, and similar tokens and assets the government may specify.

In the Budget 2022, our Hon'ble Minister of Finance Mrs. Nirmala Sitharaman made changes to the Virtual Digital Assets (VDAs) and termed that all crypto assets come under VDAs.

The decisions made in the Budget 2022 with respect to cryptocurrencies are:
  1. Whether crypto is legitimate or not, it will now be taxed at 30% because it is a sovereign right to tax.
  2. While reporting the income from the transfer of VDAs no deduction can be done except the cost of acquisition.
  3. Loss incurred while transfer of digital assets cannot be set off against any other income. This is done so for computational purposes. Further while calculating the income from such a transfer, no expenditure (except cost of acquisition) or allowance should be deducted.
  4. Digital assets when gifted will be taxed and it is payable in the hands of the receiver.
  5. Any loss incurred from the transfer of crypto assets will not be permitted to carry forward to the next financial year.

How does the new tax regime work?
The amendment made in the Income Tax, 1961 came into effect from April 2022 provided for the gains and incomes derived from VDAs.

Cryptocurrency is defined as: "..any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically�"

There may be a possibility that the tax authorities may tax NFTs under the new tax regime introduced as the definition includes tokens as well. It can therefore be assumed by the tax payers that the NFTs they acquire, sell or otherwise deal with are all taxable under the Income tax act.

Tax Liability:
The government imposes tax liability on its citizens through Section 194S of the Income Tax Act, 1961 which is comprehensive in nature. Not abiding by it is unlawful. All the trade and investments made using cryptocurrencies are recorded and will be visible to the tax department.

When a person purchases a VDA for an amount more than ₹50,000, the entire fair market value of the asset is considered taxable income under the Income tax act. When the consideration is lower than the fair market value and the fair market value exceeds the consideration by ₹50, 000 then the taxable income is the difference between the fair market value and the consideration. The applicable rate of tax depends on the tax bracket under which the person falls.

When a person earns his income from the transfer of VDA then he/she is subject to 30% tax on the amount remaining after the income earned is deducted from the cost of acquisition. Further, an equalization levy of 2% is levied. Equalization levy is a direct tax charged at the time of payment by the service recipient to a non-resident service provider.

The tax will be deducted from the profits earned using crypto currencies and NFTs throughout a financial year. It is important to note that the income earned on transactions relating to crypto can be taxed only when they are transferred and not when people are holding their assets.

Section 206AB of the Income Tax Act, 1961 states that if someone has not filed their Income Tax Return for two years and the amount of Tax Deducted at Source (TDS) exceeds Rs 50,000 in each of the two years, then the TDS for Crypto related will be at 5%. TDS provisions can be applied on the execution of order or after the order is executed.

The revised Income tax regulations state that a 1% TDS can be deducted from the final sale value of the crypto assets which will be effective from 1st July, 2022. It will be deducted even if no profit was incurred.

Exemption from TDS:
  • If consideration is payable by any person other than a specified person and its aggregate value does not exceed Rs 10,000 during the financial year.
  • If the consideration is payable by a specified person and its aggregate value does not go more than Rs 50,000 during the financial year.

Who is a specified person?
  1. An individual or a Hindu Undivided Family (HUF) whose total sales, gross receipts in a financial year is lesser than or equal to 1 crore in case of a business, or 50 lakhs if it is a profession.
  2. An individual or an HUF who has no income under the head profits and gains of business or profession.
Cryptocurrency and GST (Goods and Services Tax):
The taxability of cryptocurrencies under the Goods and Services Tax is left unclarified by the government. But then, going by the features of cryptocurrencies, they cannot be classified as money because they do not come under the umbrella of Indian or Foreign currency. Cryptocurrencies are not goods or securities. As services are defined as something that is not a good, money or security it is appropriate to classify cryptocurrencies under services as it is a transfer of VDAs.

Tips on how to save on Crypto Tax:
According to the Finance Bill, 2022 the cryptocurrencies are classified as capital assets for taxation and therefore income gained through these will be classified as a capital gain.
  1. Hold on for a longer term:
    Aim for a long term capital gain than a shorter one while investing in crypto currency. Long term capital gain is when you sell your assets after holding on to them for a period of 12 months and more.

    According to experts, long term capital gain taxation is lesser than short term capital gain taxation. This will lower your crypto taxation by 10%. Lower the tax rate, higher the savings on taxes.

    While calculating the capital gains on the transfer of cryptocurrencies, the following has to be exempted:
    • Cost of improvement of the asset
    • Expenses incurred in order to sell an asset
    • Indexation of cost of acquisition: This is based on the inflation in the country according to which the cost of acquisition of the asset changes.
    • Exemptions under Section 54F of Income tax act, 1961 which states that the capital gain on transfer of capital assets should not to be charged in case of an investment in residential house.
  2. Sell during a low-income year:
    A lower income ensures a low income tax rate for that financial year. Another advantage is that after a year tax rate will be calculated as per long term capital gains which again lowers tax rate and doubles your savings.
  3. Get indirect exposure to crypto:
    Various global investment platforms have launched portfolios which gives Indian crypto investors exposure to crypto without even investing in it or buying it. Any crypto investor could benefit from the lower taxation through the indirect exposure.
Even though the government has put a clear ban on cryptocurrencies and is introducing a VDA on its own, it has not taken a clear stance on the legality of cryptocurrencies. My opinion is that the sooner the government takes a stance, the sooner malpractice using these currencies can be curbed.

The cryptocurrencies do not function like other currencies. They do not have preset values and their ledgers are stored in multiple servers than one as they are decentralized. This makes them immune to counterfeiting and other frauds. At the same time, RBI has repeatedly warned its users about the lack of consumer protection, money laundering and even terrorist financing using crypto assets.

While cryptocurrencies are a very cost effective mode of transaction, there is a huge risk of data loss if you forget your wallet key as it is designed to be untraceable, un hackable and the user is not entitled to a refund or cancellation. Even though cryptocurrencies do have advantages, the disadvantages overweigh them more. Unless and until a VDA is designed that counters these disadvantages, use of cryptocurrencies is not advisable.

  1. The Internet and Mobile Association of India v. Reserve Bank of India MANU/SC/0264/2020
  2. Section 35A of Banking Regulation Act, 1949- Power of the Reserve Bank to give directions.
  3. Section 36(1)(a) of Banking Regulation Act, 1949- Further powers and functions of Reserve Banks.
  4. Section 56 of Banking Regulation Act, 1949- Act to apply to co-operative societies subject to modifications.
  5. Section 45JA of Reserve Bank of India Act, 1934- Power of bank to determine policy and issue directions.
  6. Section 45L of Reserve Bank of India Act, 1934- Power of bank to call for information from financial institutions and to give directions.
  7. Section 54F of Income Tax Act, 1961- In relation to Residential Property.
  8. Section 194S of Income Tax Act,1961- The consideration is payable by any person other than a specified person and the value or aggregate value of such consideration does not exceed 10000/- during the financial year.
  9. Section 206AB of Income Tax Act,1961- Deduct TDS at higher rates than usual when you make payments to those who have not filed their income tax return in the last year.

Award Winning Article Is Written By: Ms.Rashmi Narasimhan
Awarded certificate of Excellence
Authentication No: JU317920879323-28-0623

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