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Making Sense of Taxation Policy with Crypto Assets in India

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What are crypto assets? 

Cryptocurrency or crypto assets need no introduction in 2021. Cryptocurrency is a virtual currency or digital asset that is unique and impossible to counterfeit. Cryptos are a part of a decentralized network that is based on blockchain technology. 

By the very intrinsic definition of a crypto asset, they have global portability and cannot be restricted to the country borders like other currencies and assets or be regulated by specific agencies within governments.

The underlying problems with cryptocurrencies are around their classification followed by the technical problem of taxation, which will be discussed in this writeup. 

The news around crypto assets- 

Cryptos have been making headlines now and then for various reasons. Some of those reasons include controversial tweets or statements by influencers, the introduction of a new digital currency but the most important and crucial updates involve regulatory changes. 

The cryptocurrency ecosystem particularly in India has been subject to crucial regulatory challenges. Almost half a decade ago in 2013, the Reserve Bank of India had released a precautionary press release warning investors about the volatility and legalities of this virtual currency trend. 

In 2018 when the speculations around cryptocurrencies started to surface, the central bank issued the first formal circular strictly restricting banks and other financial institutions to offer facilities to participants engaged or involved in cryptocurrency transactions. 

Even though this restriction was appealed in the Apex court, a Finance Ministry Committee on virtual currencies strongly recommended banning cryptocurrencies in the Indian subcontinent. A bill, namely Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 for regulating cryptocurrencies was also proposed in the tabled bill. There was also an additional recommendation for introducing a “digital Rupee”. 

In the judgement of Internet and Mobile Association of India v. Reserve Bank of India (2020 SCC Online SC 275) the Supreme Court struck down this blanket ban of cryptocurrencies, highlighting that even though the RBI is empowered to regulate the financial sector, its act of banning virtual currencies is not proportional but rather mischievous. 

Following this judgement of the apex court, the central bank decided to clear some clouds around crypto transactions. RBI asked the banks to add another layer of hygiene check-in their KYC and other due diligence processes to deal in any facilities related to crypto transactions. 

Does this new clarification mean that India is softening its stance on cryptocurrencies and starting a new digital friendship is still under scepticism? 

Cryptos by market cap

The current proposed taxation policy around crypto assets in India? 

With the governments and regulatory authorities trying to shift their stance on cryptocurrencies from restriction to regulation and multifold increase in the number of crypto transactions in India, the issue of taxation and classification is under discussion now. 

A write up authored by Mr Harsh Bhuta, a Partner at Bhuta Shah and Co. LLP. speaks and discusses taxability of the cryptocurrencies and how should one classify virtual assets. The author highlighted how the Indian Income Tax norms and regulations are still vague and indeterminate on the impact of taxation of such assets.

A clarification from Minister of State of Finance, Mr Anurag Singh Thakur highlights that any gains resulting from the transfer of cryptocurrencies/assets are subject to tax under the head of income, depending upon the nature of holding of the same. Thus, it is at least certain that the gains from crypto assets are taxable.  

Taxability under Income Tax – 

If the virtual currency is to identify and classified as “currency”, then the transaction in question will not eligible for taxation under the Income Tax Act, 1961(ITA). However, despite the paradigm shift in RBI’s opinion of crypto transactions, it still doesn’t classify such digital currencies as currencies. The ITA, under section 2(24) provides a definition of “income” that includes a list covering “money” or “currency” and crypto assets are not a part of that inclusive list yet.

With the exclusion of cryptocurrencies from the definition, it is settled that the said assets cannot and will not be treated as currency and will not be taxed as currency. 

Taxability under Capital Gains – 

According to Section 2(14) of ITA, a capital asset is defined as a property of any kind, held by a person whether or not connected with his/her profession or business. However, the term “property”, in itself has no concrete statutory definition. “Property” can signify any and every possible interest which a person can acquire, hold and enjoy. 

This broad definition of “property” mentioned in the regulation can be a hint to investors that cryptocurrency can be deemed a capital asset if it is purchased for investment purposes by a taxpayer. The frequency and the hold period can further determine if the gain will be subject to long term or short term capital gains tax.

Taxability under Profit and Gains from Business or Professions – 

One of the crucial issues while classifying these virtual currencies is whether the treatment of such gain should fall under capital gains or business income. The simple proposed solution is if the seller is a trader by occupation, the income will systematically be classified and taxed as business income. If not, and such transactions are merely for investment purposes then as mentioned above they would be taxed as capital gains by their very nature. 

By the frequency of the transactions, the taxpayer could be identified as a trader by occupation and thus any profits from such transactions would be rightly taxed as business income. 

A worldwide view – 

Over the last few years, cryptocurrencies together with Bitcoin have been the cause of lots of debate amongst regulators across the world. While some critics of the era have long held the location that cryptocurrency can not compete with fiat currencies because of their decentralized and allotted nature, many are knowing its sheer capacity in use instances together with cross-border alternate and worldwide monetary inclusion. Governments aren’t any exception to this, with many now suggesting, or even already developing, state-sponsored virtual currencies to compete with the likes of Bitcoin.

China famously termed preliminary coin services unlawful in September 2017 and proceeded to clamp down on cryptocurrency trade working withinside the region. Before the ban, the Chinese Yuan accounted for nearly 90% of worldwide cryptocurrency trades. In 2018, however, The People’s Bank of China (PBOC) introduced the Yuan becoming utilized in a trifling 1% of Bitcoin transactions. Since then, however, numerous rumours surrounding the PBOC’s plan to release a state-subsidized virtual foreign money have emerged. The relevant financial institution virtual foreign money (CBDC) will in all likelihood be subsidized through the Chinese renminbi fiat foreign money and can even update notes and cash withinside the future.

Countries like Japan, France, and Portugal, as an alternative, have made cryptocurrency buying and selling a lot greater appealing and available to the overall public. Japan, for one, turned into the primary kingdom to permit cryptocurrency for use as a fee approach and has since regulated the atmosphere to minimize rampant fraud and hacks at numerous exchanges running withinside the region. France and Portugal, meanwhile, have introduced that crypto-to-crypto trades will now no longer cause a taxable event. The latter’s authorities have even exempted cryptocurrency from capital profits taxation.

Crypto transactions around the world

Conclusion – 

There is no debating that blockchain, cryptocurrencies and virtual assets are and will be synonymous with the future and growth. Regulating and not restricting them could boost India’s digital infrastructure transformation while reducing the burden on the banking infrastructure to facilitate securities trading, cross border transactions and compliances. However, the investors and spectators of the market need to wait for crystal clear clarity on issues of taxation, classification and likes to understand and gain from the said transactions.

Disclaimer: This write up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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