Understand cryptocurrency

What is cryptocurrency?

Cryptocurrency is considered as a quasi-currency in digital forms and is often termed Digital Money. It is nothing more than a digital file that is created using the same methods as cryptography (i.e., the science of encrypting information).  It is believed to have a 'decentralized control' i.e., it is not controlled by one person or Government. There are normally three ways by which the transaction in cryptocurrency is undertaken:

1. Purchase of cryptocurrency from crypto exchange
2. Receive cryptocurrency as a consideration
3.  Mining of cryptocurrency

In short, cryptocurrency can be acquired through mining activity or by purchasing through exchanges or accepting it in exchange for goods or services.

Taxation of Cryptocurrency:

It may be noted that there are no clear cut specific guidelines and provisions for the taxation of cryptocurrency and hence it will be governed by the existing provisions of the Income Tax & GST Act. The same may be summarised as under.

 Income Tax Implications on cryptocurrency:

Taxation of income in India is governed by the provisions of the Income Tax Act, 1961. Section 5 provides for the Scope of total income & section 2(24) defines the term "Income" which is inclusive.  Both these sections are wide enough to make gain from cryptocurrency liable for taxation. The taxation of income under any of the five heads (Income from Salary, House Property, Business Income, Capital gain, or income from other sources) normally depends upon the activity, nature & motive of the assessee.  However, the same can be broadly summarized as under:

1. Any taxpayer accepting cryptocurrency against the sale of its goods or services will be liable for taxation under the head "Income from Business" based on the fair market value of such currency. It will be required to be documented in the books of accounts as a sale consideration.

 

2. (a) Any person who is purchasing & selling cryptocurrency may be liable for taxation either under the head "Income from Business & Profession" or "Income from Other sources" or "Income from Capital Gain" depending upon the frequency, volume, intention & nature of the transactions.
3. (b) The term "Capital Assets" has been defined inclusively to include property of any kind & so any person purchasing cryptocurrency as an “Investment” may be liable for its taxation under the head “Income from Capital Gain”.  If investors hold cryptocurrencies for 36 months or more, the gains would be taxable as Long-Term Capital Gains (LTCG) and if held for less than 36 months, it would be Short-Term Capital Gains (STCG).

 

 

4. Whether income from cryptocurrency can be considered Speculative Income u/s 43(5)?:
5.  

U/s 43(5), Speculative transaction means, a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts. According to this definition, transactions in crypto may not fall under speculative transactions as it only covers transactions for commodities, stocks and shares and crypto is neither commodities nor stocks/shares/security.

6. Taxation in the hands of the persons who are involved in mining activities of cryptocurrency:
7.  

Crypto miners are in the business of generating crypto assets using their computers, power, human resources, etc. and so it would fall under the definition of business which includes any trade, commerce or manufacture or any adventure or concern like trade, commerce or manufacture.  For crypto miners, income would be liable for taxation under the head “Income from Business” and they would be eligible for all the expenses incurred for earning such income.

Whether Cryptocurrencies could be subject to GST?

1. (a) GST is applicable on the supply of goods or services or both.
2. (b) Article 366(12) of the Constitution defines "goods" to include all materials, commodities and articles. Further, Article 366(26A) defines the term "services" to mean anything other than Goods.
3. (c) The definition of Goods as given in Section 2(52) & Service u/s 2(102) of the CGST Act is wide enough to bring cryptocurrency in the net of GST. The definition of “Goods” as well as “service” excludes money and securities.
4. Cryptocurrency is not recognised as a legal currency in India which means that it will fall within the definition of "Goods" & it will be treated as a 'taxable supply" to be liable for GST.
5. Since cryptocurrency is not a recognised currency, the supply of cryptocurrency as goods or property in exchange for other virtual/ tangible goods may fall within the ambit of ‘barter transaction’. As a result, GST will be levied on the value of cryptocurrencies.
6. Further, one may consider that the mining of cryptocurrency as an activity is done in furtherance of business and so many transactions of mining may also be considered as 'service' within the ambit of the GST Act

Cryptocurrencies are unique in their technical aspects and can have differential tax implications. Above are views summarised for the sake of understanding. Individual factors may warrant differential tax treatment. Taxpayers need to be cautious & may consider the above tax angel while transacting it in cryptocurrency.