Cryptocurrency in India may result in tax liability, but the rules are still unclear as the Reserve Bank of India has yet to grant this asset class legal tender status. However, in March 2020, the Indian Supreme Court authorized banks to handle cryptocurrency transactions from traders and exchanges.

In this article, we discuss the generation, buying and selling of cryptocurrencies in India and the key points where their transactions may have tax implications.

‘Cryptocurrency’ or ‘crypto assets’, including stablecoins and tokens, are a decentralized form of digital currency, based on blockchain technology – a distributed ledger enforced by a disparate network of computers . Ranging from decentralized digital tokens, such as Bitcoin, to official digital currencies of central banks, backed by sovereigns, digital currency is increasingly accepted as well as the enthusiasm of its users.

These digital currencies aim to mimic the uses of traditional money as a means of payment, store of value and unit of account. Mainly used for investment purposes, they have also been used by businesses as payments in lieu of goods and services exchanged. Since they are not issued by any central authority, these cryptocurrencies are currently safe from government interference and manipulation.

At the start of 2021, there were over 4,000 different cryptocurrencies in circulation around the world, including market giants Bitcoin, Ethereum, Litecoin, and Dogecoin. Despite the exponential increase in the number of digital currencies, 90% of the market is claimed by the top 20 cryptocurrencies. As of May 2021, the aggregate value of all cryptocurrencies in the world was $ 2.8 trillion.

Cryptocurrency in India

According to data from blockchain analytics firm Chainalysis, Indian cryptocurrency investments reached US $ 6.6 billion in 2021, due to a shift in mindset among young investors – moving away gold and other precious metals. Another reason is the security and transparency provided by this technology.

According to a report, more than 10 million crypto investors were added by India in 2021. This is remarkable in light of speculation that the federal government is considering banning the use of cryptocurrency. However, nothing can be conclusively said unless the law regulating digital currency is passed.

How is cryptocurrency acquired or generated?

Cryptocurrency can be generated in the following ways:

• Mining: Crypto “mining” is when an individual miner uses computer technology to solve complex algorithms / codes / equations and record data on the blockchain. In exchange for this work, one can receive payment in new crypto tokens.
• Purchase: buy it from exchange offices using real currency and store it in an online currency wallet in digital form.
• As legal tender: It can be used as consideration for the sale of goods and services, instead of real currency.

Legality of cryptocurrencies in India

In 2018, the Reserve Bank of India (RBI) banned the use of cryptocurrency as legal tender in India by issuing a circular. However, this ruling was overturned by the Indian Supreme Court in March 2020, allowing banks to handle cryptocurrency transactions from traders and exchanges.

The Cryptocurrency and Official Digital Currency Regulation Bill, 2021 has been tabled by the government in parliament and will most likely be discussed in the next monsoon session.

Tax implications of cryptocurrency in India

The Reserve Bank of India (RBI) has not yet granted Bitcoin or any other cryptocurrency the status of legal tender in India. Therefore, there are no clear rules or guidelines defining the taxation of cryptocurrencies, which requires specific clarification from the Income Tax (IT) service.

However, experts have speculated on various possibilities in which cryptocurrency transactions can be taxed under the Income Tax Act 1961 as well as the Central Goods and Services Tax Act 2017. (CGST), depending on the type of transaction. Meanwhile, the Ministry of Commercial Affairs (MCA) has made it mandatory for companies to disclose cryptocurrency exchanges / investments during the fiscal year.

Taxation under the Income Tax Act

Here is an overview of the different cryptocurrency transactions and their tax implications under the Income Tax Act:

Profits and gains from business and the profession

These transactions include the receipt of cryptocurrency in return for the sale of goods or the provision of services, as well as the sale and purchase of cryptocurrency as a stock in commerce. These transactions are taxable under the Income Tax Act.. Under Section 2 (13) of the Income Tax Act, the definition of business is inclusive, including “commerce, commerce or manufacture or any such venture or concern”. Any continuing activity such as cryptocurrency trading is included in this definition, and profits made are taxable under it, taxable under section 28 of the Income Tax Act.

Income from other sources

This income includes mining cryptocurrency, trading cryptocurrency for investment purposes only, and receiving cryptocurrency as gifts. These transactions are taxable under the Income Tax Act.

• Generation of cryptocurrency through mining: Since the generated digital currency will be treated as self-generated assets, there is uncertainty as to how they will be taxed and whether the capital gains provisions will apply, or whether they will be classified under the heading ” income from other sources â€. Experts believe that foreign exchange generated by mining will indeed be considered income from other sources. It should be noted that section 55 of the Income Tax Act, which deals with the cost of acquisition and improvement, does not recognize mining.
• Receive Crypto currency as a gift: Donations received are taxed as income from other sources and are taxed at the individual bracket rate. Therefore, cryptocurrency received as a gift will be taxed as income from other sources at the rate of the relevant slab and cryptocurrency received as a gift valued at INR 50,000 (USD 671.07) and above. will be fully taxable.

In addition, tax exemptions on gifts received may also apply to cryptocurrency. Some of the gift tax exemptions are gifts received:

1. From parents
   2. On the occasion of the wedding
   3. By will or by inheritance

Wage and home ownership income

Since cryptocurrency is not recognized as legal tender by the government, employers cannot make salary payments using this digital currency. Likewise, paying rent using this currency is not legal and therefore unrecognized. Therefore, it will not have any tax liability in India under this Act unless specific guidelines in this matter are announced.

Capital gains

Article 2 (14) of the Income Tax Act defines fixed assets as “property of any kind held by the appraised, whether or not it is related to his business or profession”. Thus, fixed assets include all kinds of property, with the exception of those expressly excluded under the Act. Therefore, all gains resulting from the transfer of cryptocurrency should be considered as capital gains, if they are held for investment purposes. Depending on how long these crypto assets are held for investment purposes, they would be subject to long-term capital gains tax (20% after indexation) or short-term capital gains tax. (taxed according to the individual slab rate).

Taxation under the Central Goods and Services Tax Act

Any commercial activity relating to cryptocurrencies or cryptographic assets, except specific exemption, is taxable under the CGST law.

Indian crypto exchanges already charge GST to their users. This indirect tax is included in the trading fees that the exchanges add to the purchase price of Bitcoin, Ethereum, Tether, etc. In addition, the stock exchanges pay the GST to the government as part of their general tax payments.

Recent reports suggest that foreign crypto exchanges in India may have to pay an 18% GST on cryptocurrency transactions in India. A 2% equalization tax could also be imposed on them. To include these overseas crypto exchanges under the Indian tax umbrella, the Indian government could classify overseas crypto exchanges with Indian users as online information database access and retrieval. (OIDAR) services.