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The Muddle Of Taxation In Regulating Cryptocurrency In India

In the Indian context, a market far from ripe for cryptocurrencies, is just as unpredictable as its legal framework is. The same uncertainty carries forward to the tax statutes that are supposed to govern cryptocurrency. Nobody can discriminatively say if the lack of legal analysis in India on a spontaneously growing market of cryptocurrencies is due to the banks being insecure of a decentralised system or the sheer complexities of incorporating them in the law.

This paper analyses the current position of statutes, especially concerning taxation over cryptocurrency. It then attempts to analyse how crypto should be segregated so as to tax it in accordance with the appropriate slab, additionally what is the position of law on the taxability of profits made from selling crypto. Further, it goes over regulatory obstructions and attempts to present proposals and suggestions to overcome the same.

Current Legal Scenario
In its policy to tax profits on crypto by classifying them as capital gains, it would seem that India has adopted an approach similar to that of the UK1 , however, in its potential policy of banning pre-existing cryptocurrencies to introduce a state backed digital currency for it to be ultimately regulated by the RBI is similar to that of China.

It would be noteworthy that regulations in the domain of cryptocurrency exchanges have progressively become controlling to the extent of The Reserve Bank of India banning financial institutions from indulging in transactions with cryptocurrency; with much needed judicial intervention, the said ban was lifted by the Apex Court in Cryptocurrency v. RBI2, providing a necessary relief.

It was held that the RBI has failed to depict any damage to banks or similarly regulated entities, caused by trading of cryptocurrency and that in the latter's functioning, the 'banking system was the lifeline' for trading. Post judgement, there have been demands from the industry leaders of cryptocurrency, for it to be included in the RBI's regulatory sandbox.3

The lack of regulation has subjected the world of cryptocurrency to transform into means of money laundering. However, the Central Economic Intelligence Bureau has suggested the bitcoin would be classified as an 'intangible asset' and GST would be levied on it accordingly. CEIB has proposed to levy 18% GST on transactions, which could amount to roughly 40,000 crores of revenue annually.4

In India, there is no definition of currency or virtual currency per se; neither can the latter be read into the definition of foreign currency.5 The Apex court has affirmed the view that cryptocurrency cannot fall under the ambit of this act in TCS v. State of AP 6 and Shankara Rao Badam & Ors. v. State of Mysore & Anr, 2002 178 ELT 22 S.C.

Therefore, as of now, Bitcoin operates as an asset in India, i.e., a store of value which when sold, incurs capital gains that can be taxed. However, Bitcoin, being a cryptocurrency can be used as a medium of exchange as well, thereby bearing the charge of indirect goods tax as well, consequently creating the double taxation problem.7

Taxation of Crypto Worldwide

Crypto taxation is very dependent on the legal classification of digital currency as an asset, currency, commodity, property, and so on in the nation in question, and also the tax structure in place. Most nations impose wealth tax, CGT or income tax.
  • Germany has been labeled a "crypto tax haven." because it does not recognise cryptocurrency as a monetary currency, stock or commodity. Crypto, on the other hand, is deemed private money. This difference is critical since private sales in Germany result in tax benefits. Private sales with a value of less than Euros 600 are tax-free.
     
  • In the US gains or losses on crypto assets kept for less than a year are taxed at the greatest marginal tax rate available to your taxable income. Any losses could be used to offset up to $3,000 overall in income tax. Any further losses can be carried to the following year. If the cryptocurrency is held for longer than a year, the relevant tax rate is significantly lower, varying from 0% to 15% to 20%, based on the individual or joint marital income.
     
  • Cryptocurrencies are classified as legal property in Australia, making them liable to capital gains tax.
     
  • The Netherlands tax regime is distinct from the Commonwealth nations. Instead of a capital gains tax, it imposes a wealth tax.
     
  • Bitcoin and other cryptocurrencies are legal in Canada. You may buy items and services using digital currencies on the Internet and at businesses that accept them. Based on the type of the trading operations, crypto is subject to either CGT or income tax in Canada. If the income is earned from a business, the entire amount is taxed, however capital gains are only taxed 50% of the time.
     
  • Japan adopts a proactive stance on cryptocurrency rules, acknowledging cryptocurrencies as legal assets. Japan considers bitcoin trading earnings to be "miscellaneous income" and taxes traders accordingly.
     
  • Since long-term capital gains really aren't taxed, Singapore is known as a bitcoin safe haven. Companies that routinely deal in cryptocurrencies, on the other hand, are subject to taxation, with gains being treated as income. China has banned crypto exchanges and bitcoin mining in the nation.8

Classification Problem
The views of the Chairman of the Central Board of Direct Taxation are in consonance with multiple officials from the income tax department when they say that for individuals to be liable to pay taxes on cryptocurrency, it should be treated as a part of capital gains.9

In common parlance around income tax, the tax structure enforced on cryptocurrency ideally depends on the nature of its investment, i.e., whether the same is in the form of an asset or currency. However, the distinction lies wherein if cryptocurrencies are traded frequently as a business income, then the profit gained on the same can be taxed according to the respective slab rate but if it is held for investment purposes then the tax rate can be applied on profit in the form of capital gains.

Further, if an individual uses their investment within a span of 3 years, then the relevant tax slab would be applied on the profit in accordance of it being a short-term capital gain but if the taxpayer redeems their investment after a span of 3 years, then the profit can be regarded as a long-term capital gain and therefore will be taxed at 20% with indexation.10

Crypto Mining:

Ideally the process of mining cryptocurrency is considered as a taxable event, and the same generated by the process of mining can be considered as a self-generated capital asset. However, this asset cannot be taxed as capital gain because in India 55 of the I-T Act11 does not recognise it as such. Specifically for mining if the taxpayer runs in mining business, then they can avail business deduction on their tax bill in lieu of the resources utilised in the process of mining, and such relaxations cannot be availed if mining cryptocurrency has been done in furtherance of personal gain.12

Particularly Bitcoin, being a self-generating asset like other cryptocurrencies, cannot be evaluated for a definite cost of acquisition hence the mechanism of computing capital gains on the same fails as supported by the decision of the Supreme Court in the case of BC Srinivasa Setty.13

Since as of now the Indian tax laws are completely silent on the taxability of bitcoins it would be safe to assume that the income tax authorities would opt for taxing the value of crypto currency generated via mining under the head of 'income from other sources'.14

Crypto as Stock:

If the activity of trading crypto currency generates income as part of a business model, then the profits made by such business would be subject to tax according to relevant slab rates.15

Crypto as Consideration/Compensation:
If crypto currency or specifically bitcoin is exchanged for goods in a transaction then it shall be treated on par with the receipt of actual money and would make a part of the recipient's net income, consequently they would be taxed normally under the category of profits from profession.16

Disclosure of Income from Crypto:

Taxpayers with the income exceeding 50,00,000 rupees per annum are mandated to disclose their assets and liabilities in the schedule to assets and liabilities accompanied by the cost of acquisition; this is inclusive of crypto currencies since for the purpose of disclosure of income they are considered as assets.

In his budget speech in the budget of 2018 Mr Arun Jaitley stated that 'The Government does not consider crypto-currencies as legal tender or coin and shall take all possible steps to eliminate the use of crypto assets practiced in financing illegitimate activities as well as eradicate them from being a part of the payment system. However, it will explore use of blockchain technology proactively for effectively ushering in a digital economy and will soon dispel the ambiguity around the taxability, legality and disclosure mandates in the domain of cryptocurrency.'

Liability Depending on How the Crypto was Held:

According to 2 of the I-T Act 17 , any property held by a person regardless of it being connected to their business or profession shall be classified as a capital asset. As explained above, in the case of virtual assets such as cryptocurrency, the income generated from the investment shall be counted as capital gains but can be filed under income from other sources as well, meaning for the purpose of tax calculation the duration for which crypto currency was held by the taxpayer will be factored in.

Tax and Regulatory Difficulties

  • Till now, the RBI has not declared bitcoins or other cryptocurrencies as a formally approved currency, and this seems to be a remote possibility. Fiat currencies are often backed by governmental bodies or central banks and are secured by assets like gold that are held by the issuing institution. Bitcoin generated by the blockchain technology doesn't really satisfy those requirements. If bitcoin had been categorised as currency, it would have been instantly exempted from GST because the term "goods'' does not cover currency.
     
  • Property of any type which is movable in nature qualifies as a good under the Sale of Goods Act of 1930 if it is sold in exchange of monetary consideration. Hence, bitcoins are goods as per this statute only in transactions of fiat to crypto or crypto to fiat. Barter exchanges are not authorised which will in theory cover all transactions of crypto to crypto. Using the same reasoning, a person purchasing other products using crypto would not be included as per the Sale of Goods Act, 1930.
     
  • Since the scope of "goods" is broad enough to include intangible property such as cryptocurrencies, GST must also apply to cryptocurrency trades. If bitcoin is sold for fiat money in such a case, there is a single supply which should be subjected to GST. When bitcoin is exchanged for another product, it should be regarded as a barter or, more accurately, two supplies happening simultaneously, leading to two GST payments causing a severe GST effect.
     
  • The Income Tax Act, 1961 defines capital assets as any property of any sort, which is likely to include bitcoins. The issue then becomes whether bitcoins may be classified as a stock-in-trade or capital asset. Judging by past explanations by the Central Board of Direct Taxes about the categorisation of shares as stock-in-trade or capital assets, it might be plausible to consider a bitcoin sold by a normal customer to be a capital asset, while a crypto trader may classify it as stock in trade. When it is classified as stock-in-trade, taxes on the amount received will be due under the heading of business income.

    If bitcoin is supplied by a customer but not during the course of business operations, such as to purchase coffee, it should not be considered a taxable supply as per GST.
     
  • Individuals, particularly those who purchased bitcoins with cash in the early days of bitcoin or NRIs, are at greater risk of being examined. There is no need for an NRI who holds bitcoins outside of India to declare their ownership in India. If an NRI receives money from the sale of crypto in India, then only he or she is required to report it and pay taxes. Nevertheless, if an NRI sells bitcoins outside of India and then tries to send the money back to India, it would be carefully examined since they would have mostly earned significant profits. Income tax authorities might issue notices, inquiring about the source of income or wealth and demanding evidence that it is not hidden or black money.

    This may be a major issue since proving how bitcoins were obtained in the early years of the ecosystem can be challenging at times. It's also difficult to prove that the bitcoin was purchased outside of India since it's a location-less asset, with the closest estimate to a location being the wallet in which it was kept at the time of purchase. However, it's likely that customers are unaware of the location of the server where the wallet is stored, which may result in litigation.
     
  • Likewise, resident Indians who've already purchased bitcoins outside of India are required to report foreign assets and funds in foreign banks. Even for legitimate users, the concerns identified with regard to source of money and asset location may continue to be complex challenges. In the event that they make a mistake, the consequences could be severe.
     
  • Since utility tokens indicate a claim for movable goods or services, they may not be taxed under GST, which excludes actionable claims under GST except for gambling, betting, and lottery. When such tokens do not constitute an actionable claim, then perhaps the point of taxing is moved to the time when the token is actually swapped for services or commodities.
     
  • If the RBI imposes a ban, it will be impossible to implement in reality since the consumers will lose value, exchanges will lose business, government will lose revenue, and transactions would most likely shift overseas or underground. All parties are losing in this scenario, and now the only way ahead is to acknowledge the problems in the present approach and take appropriate measures to govern cryptocurrencies in India.18

Conclusion
The Government of India has stated several times that cryptocurrency-related earnings will be taxed based on the method of the cryptocurrency being held. On crucial issues like what will be the initial tax event and the valuation process, as well as who must be responsible for reporting cryptocurrency trades, a precise road map and formal instructions are eagerly expected.

The Income tax authorities have delivered letters to cryptocurrency investors and exchanges in past years, requesting information about their bitcoin operations. As a result, it would be interesting to observe how the Indian government implements crypto legislation. If properly regulated, this asset class might provide significant tax income for the government, which could be utilised to support the country's development goals.

End-Notes:
  1. (Yadav, Aman, Cryptocurrency in India: to Ban or not to Ban (March 2, 2021). Aman Kumar Yadav, 'Cryptocurrency in India: To ban or not to ban' (The RMLNLU Law Review Blog, 2 March 2021), available at: https://rmlnlulawreview.com/2021/03/02/cryptocurrency-in-india-to-ban-or-not-to-ban, Available at SSRN: https://ssrn.com/abstract=3803471
  2. Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018
  3. https://inc42.com/features/cryptocurrency-vs-rbi-the-sc-judgement-and-the-aftermath-in-india/
  4. http://timesofindia.indiatimes.com/articleshow/80001885.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
  5. Foreign Exchange Management Act 1999, s 2,
  6. S.B. Sinha, J. in Tata Consultancy Services v. State of Andhra Pradesh, 271 ITR 401 (2004)
  7. Australian Taxation Office, GST removing the double taxation of digital currency QC 54210, 3rd Nov. 2017
  8. Smith T, 'Cryptocurrency Regulations Around The World' (Investopedia, 2021)
  9. TimesofIndia, 'Those who have earned from Bitcoin will be taxed: CBDT Chairman' (The Times of India, 6 February 2018
  10. Amit Gupta, 'Investing in cryptocurrencies? Know the tax implications' (The Economic Times, 4 July 2021)
  11. The Income-Tax Act, 1961
  12. Supra, note 10.
  13. Commissioner of Income Tax v. B. C. Srinivasa Setty, (1981) 2 SCC 460
  14. Clear, 'Income tax on Bitcoin & its legality in India' (ClearTax, 21 September 2021)
  15. Nishchal Joshipura and Meyyappan Nagappan, 'Crypto-currencies- Regulatory and Tax Issues' [2018] CTCITJ. I (4) The Chamber's International Tax Journal 86-90.

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