What is Cryptocurrency?
Cryptocurrencies work using a technology called a blockchain. Blockchain is a decentralized technology spread across many computers that manage and record transactions. Part of the appeal of this technology is its security.
A cryptocurrency is a form of :
● Digital cash or Virtual currency
● Secured by cryptography
● It’s impossible to counterfeit or double-spend.
● Companies issue currencies are called TOKENS and these can be traded specifically
● For goods or services that the company provides.
Future of Cryptocurrency
The main point of cryptocurrency is to fix the problems of fiat currency, by putting
the power and responsibility in the currency holder’s hands
● Reduce inflation
● Make the system transparent
● To create higher returns than what’s available in banking channels.
● Increasingly wide acceptance as a payment method
● Ease of International transactions
● Generally lower transaction fees
● Independence from political agents and its creators
● Transaction security
● Traceability and power distribution
Will Cryptocurrency be ban in India?
No, cryptocurrency will not be ban in India. It is taking time and the delay is frustrating; but, blockchain and cryptocurrencies have a bright future in India. The government will bring out the best policy for Cryptocurrency. Reasons for banning the cryptocurrency were:
- Money laundering
- KYC process, and other related issues
- Creation of an underground channel for fund misuse
- Hawala settlements
- Increase in fraud and terrorist funding activity
How are people earning in Cryptocurrencies?
- Buying: Buying via a Crypto-exchange
- Freelancing Income: Cryptocurrency paid for services rendered
- Mining: Rewards of solving cryptographic equations
- Investments: Portfolio management solutions & Investment services.
Cryptocurrency Indian Tax Regime and Legal Compliances
What is the various head under Income Tax?
- Cryptocurrencies can be taxed under either of three heads depending upon the nature of
transaction done by assesses.
- Remember that income tax is considered only over “Income”.
- And yes, if you make “losses” you can set it off from the income.
- Profit and Gains under Business and Profession.
- Capital Gains
- Income from Other sources
Provisions for the setting off losses
Set-off of losses means:
“Adjusting the losses against the profit or income of that particular year.”
- Losses that are not set off against income in the same year can be carried forward to the subsequent years for set off against income of those years.
- A set-off could be an intra-head set-off or an inter-head set-off.
- Only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1).
- Such loss can be carried forward for eight years immediately succeeding the year in which the loss is incurred.
When is cryptocurrency treated as a Capital asset?
There is no specific provision in the Income-tax Act, 1962 about the taxability of cryptocurrencies.
As per the general provisions, The Income-tax Act, 1962
Cryptocurrencies could be deemed as Capital assets if they are held as an investment by the taxpayer. Definition of Capital Assets under Section 2(14), Any kind of property held by an Assesses would come within the definition of ‘capital asset’.
Whether Cryptocurrency/coin is a currency will remain a matter of dispute until the RBI clears its stand on it. If declared as a currency, any trading in it will be subject to FEMA regulations.
Taxation under Capital Gains
When will the cryptocurrency be taxed as Under the head of capital gain and what will be the rates: Capital assets (Investment or property): Income taxable under the head of Capital Gain. Taxation of cryptocurrency as a capital asset, may be taxed in the current scenario as follows:-
Particulars Type of Gain Rate of Tax
Holding period > 36 months LTCG Flat 20%
Holding period < 36 months STCG At slab-rate
Disclosure: If a company has crypto assets it should give the disclosure as per, The Companies Act 2013 (Schedule III) circular classified Cryptocurrency as “Assets”
When is income treated as a business income?
● The supply of goods or services by a person against cryptocurrency / Coins
● Stock-in-trade, income from trade
● Any other intermediaries
In all the above cases, income arising out of trading in cryptocurrency will be considered as income from the business, and will be offered under the head “Profits and Gains from Business or Profession”.
When is Income Treated as an Income from IOS?
The Regular (interest or dividend) Income Generated through Investment in various Instruments of Cryptocurrency has to be taxed as IOS:
“Income from Other Sources”. In absence of any clarity the tax implications is discussed based on the existing tax law, however, specific clarifications are required from the tax department, Otherwise, we have to treat the gains of cryptocurrency the same way we treat any other income which cannot be taxed elsewhere. The implications of these will be that gains because of CryptoCurrency may have to be taxed at the highest rate of tax.
These have been the opinion of many tax officials in notices send to taxpayers previously. If any earnings you make from crypto trading are taxable like any other income and should be declared in the IT returns.
Cryptocurrency Ban 6th April 2018
The Central bank, in its circular dated April 6, 2018
- Prohibited banks from dealing in cryptocurrencies or offering any service to customers on them.
- No financial Institute is allowed to transact, no services can be provided by any financial institution.
- Thus, no Transaction is allowed in legal currency in India.
Various laws coming into effect:
- Section 35A read with section 36(1)(a) of Banking Regulation Act, 1949, And Section 35A read with section 36(1)(a) and section 56 of Banking Regulation Act, 1949.
- Section 45JA and 45L of the Reserve Bank of India Act, 1934.
- Section 10(2) read with Section 18 of Payment and Settlement Systems Act, 2007.
Official Digital Currency Bill, 2019 – Banning and Regulation
No person shall mine, generate, hold, sell, deal in, issue, transfer, dispose of or use
Cryptocurrency in the territory of India.
● Nothing in this Act shall apply,
- To any person using technology or processes underlying any cryptocurrency for the purpose of experiment or research, including imparting of instructions to pupils provided that no cryptocurrency shall be used for making or receiving payment in such activity.
- To the use of Distributed Ledger Technology for creating a network for delivery of any financial or other services or for creating value, without involving any use of cryptocurrency, in any form whatsoever, for making or receiving payment.
- Penalty the higher of –
- 3X the loss or harm caused by the person,3X the gain made by the person.
- If the loss/ gain made by the person cannot be reasonably determined, The maximum amount of fine that may be imposed on such persons shall be as specified in First Schedule as against each of the offenses under Sections 8 and 9.
The Supreme Court Judgement, 2021
- The Cryptocurrency and Regulation of Official Digital Currency Bill 2021, seeks to create a facilitative framework for an official digital currency that will be issued by the Reserve Bank of India (RBI).
- According to the court, the RBI’s circular, in imposing a wholesale moratorium on the provision of banking services to these dealers, unreasonably impinged on what is otherwise a valid vocation, by going beyond the limitations permitted under Article 19(6).
- By virtually choking into submission any VC exchange, the circular, according to them, infringed the right to practice any profession, or to carry on any occupation, trade, or business, contained in Article 19(1)(g).
GST Application and Reasons:
Will cryptocurrency “mining” be treated as a service? Yes, Reasons
● It generates cryptocurrency
● It has transaction fees.
● “Tax will be collected from the miner on transaction fees or reward.”
● If the value of the reward exceeds Rs. 20 lakh, individual miners
Are “wallets” storing keys as taxable? Yes, Reason
Wallet service providers should be registered under GST.
● Cryptocurrency exchanges need to register and pay tax on their earning.
● Trading may attract 18 percent GST.
● Trading may attract 18 percent GST.
Buying and selling of cryptocurrencies will be considered under the category of supply of goods. Other related facilitating transactions will be counted under services and these would include supply, transfer, storage, accounting, among others.
Application of the Companies Act 2013
Indian Government wants to monitor and regulate the cryptocurrency and all the corresponding transactions arising. As per the notification issued by them:
All details of the cryptocurrency or any other virtual currency must be furnished by the company where the company has traded or invested in cryptocurrency or Virtual Currency during the financial year and the following details must be disclosed.
- Profit or Loss on transactions involving Cryptocurrency or Virtual Currency
- Amount of currency held as at the reporting date
- Deposits or Advances from any person for the purpose of trading or investing in cryptocurrency/ virtual currency.”
Latest News of Cryptocurrency world
On 5th June 2021, El Salvador has become the first country in the world to formally adopt cryptocurrency after its Congress voted overwhelmingly to approve a law classifying Bitcoin as legal tender. President Nayib Bukele, an initiative he hopes will boost foreign investment, improve financial inclusion and generate jobs. The country is planning to give out starter accounts with $30 to promote its use.
On 25 June 2021, the South American nation, Paraguay has become the second country after El Salvador to propose a bill to make Bitcoin legal tender. The bill in support of the cryptocurrency was proposed.
Latest News of Cryptocurrency world
July 2, 2021
With the Indian government mulling over new laws to regulate cryptocurrencies in the country, the indirect tax department is looking into whether overseas exchanges need to pay the Goods and Service Tax (GST) at 18%.
- The 18% slab is meant for capital goods and industrial intermediaries, among other times, while the highest slab of 28% applies to luxury goods, like automobiles. It’s the same as the tax on brokerage with trading in conventional shares on the stock market.
On 22nd June 2021
Existing law in India could mandate a 2% levy on cryptocurrency purchases.
- Meaning: Existing law in India could mandate a 2% levy on cryptocurrency purchases from offshore-based exchanges servicing India’s market.
In the absence of any guidelines on the treatment of crypto assets, there is ambiguity in how these would be treated under the tax laws and FEMA (Foreign Exchange Management Act).”
Remember: In March 2020, India’s Supreme Court repealed the RBI’s two-year prohibition on local financial firms providing banking services to businesses operating with crypto assets.
What is NFT, a Non-fungible token?
Non-fungible tokens (“NFTs”) are digital tokens that operate on a public blockchain and can be used to represent ownership of a unique item, whether digital or physical.
- Each NFT is unique and unlike other fungible assets or currencies, they cannot be exchanged with one another.
- NFT products can be representative of a variety of elements and can tokenize things like.
- Fashion items to collectible sports cards, virtual real estate and characters.
Who is NFT Creator?
Developers or by users through third-party marketplaces.
NFT, Non-fungible token minting
Non-fungible tokens (“NFTs”) marketplaces example
● Nifty Gateway
They facilitate the online sale of items through the use of NFTs to represent title or ownership. A typical NFT marketplace transaction begins with the seller “minting” an NFT to represent ownership of the unique item that they wish to sell. The seller then lists the item on the marketplace. Both stages require payment of a “gas fee”, which users are responsible for paying towards the computing energy required to validate transactions on the blockchain.
The gas fees fluctuate depending on the time of day and is sent directly to miners who run the blockchain network. Once the item is listed on the marketplace, a buyer may either purchase it directly or place a bid in an auction.
The buyer pays the consideration amount, the gas fees, and the commission charged by the marketplace.
The entire transaction usually takes place through the operation of a smart contract where payments are automated and made directly between parties instead of through the intermediary NFT marketplace.
- The definition of e-commerce operator under the equalization levy, provision is very wide and may extend to any electronic service which may facilitate a buyer and a seller to carry out an NFT transaction, including the blockchain operators and not just the NFT marketplace.
- At no point during the transaction does the NFT marketplace have access to the sale consideration of the NFT. This non-custodial feature results in a situation of impossibility where the marketplace would have to pay 2% of the entire consideration, even when it does not have access to the consideration amount.
- It is unclear whether the gas fees, which go neither to the seller nor the e-commerce operator but directly to blockchain miners, would be considered to be part of the tax base for levy of EL in the hands of the NFT marketplace.
- It may be impractical or unfeasible for the e-commerce operator to keep track of the IP address or the location or residency of each buyer or seller for determining the applicability of
NFT, Non-fungible token taxation in India
Section 194-O of the Income-tax Act, 1961 (“ITA”)
Imposes withholding tax obligations on e-commerce operators from April 1, 2020. Section 194-O does not make a distinction between a resident and a non-resident e-commerce operator. Therefore, basis a strict reading, the withholding obligations under section 194-O may also apply to a non-resident e-commerce operator facilitating the sale of goods or provision of service of a resident seller, hence, increasing the compliance burden for non-resident e-commerce operators.
Section 194-O provides that the e-commerce operator would be liable to withhold tax at the time of credit of consideration to the resident seller, at the rate of 1% of the gross amount of sale.
Further, when the sale is facilitated by e-commerce.
Via E-Operator, payment is made by the buyer directly to the resident seller, section 194-O deems the e-commerce operator to have paid the resident seller such money and therefore be obligated to withhold income-tax at 1% on such sums as well. Therefore, it may be possible that the non-custodial NFT marketplace does not credit the amount to the seller, it would be liable to deduct tax on the consideration paid directly to the seller through the smart contract. The application of this section would create cash flow problems for an NFT marketplace or similar facilitation platforms as they would have to withhold tax on gross consideration (including sales commission) irrespective of whether the consideration flows through them or not.
NFT, TCS Tax collected at source: Section 206C
When is TCS attracted?
The buyer and the seller also need to discharge tax liability at the time of sale of goods. Section 206C imposes an obligation on a seller to collect “Tax at source” at a rate of 0.1% of the sale consideration received on the sale of goods in excess of INR 50 lacs as income-tax. Please note that this tax is required to be collected by the seller from the buyer only if the total sales, gross receipts, or turnover of the business carried on by the seller is more than INR 10 crores during the financial year immediately preceding the financial year in which the sale of goods is carried out.
Further, the TCS is deemed to be payment of tax on behalf of the buyer and the buyer is given the credit of such TCS. Under the recently introduced section 194Q, the buyer has a liability to deduct tax at source at a rate of 0.1% on the consideration paid for a sale or aggregate of sales exceeding INR 50 lacs, provided the buyer had a gross turnover exceeding INR 10 crores in the previous year.
The interplay of section 206C and section 194Q is such that while section 206C releases the seller from the TCS liability if the buyer is required to withhold tax under any provision of the ITA, section 194Q to the contrary provides that the withholding obligation will be applicable on the buyer irrespective of seller’s TCS liability. Whereas in a physical sale of goods, a buyer and a seller could communicate to each other to figure out which provision would be applicable, such communication is limited when the sale of goods is taking place through an NFT transaction. Another concern for buyers is that when a sale of physical goods takes place through an NFT, either the seller or the marketplace would have to take responsibility for the delivery of the goods. This responsibility may not be currently accounted for in the terms of service of various marketplaces, as the focus is primarily on the online sale of digital goods which could take place in a non-custodial manner through the operation of smart contracts.
Author: CA Riddhi Jain
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