Transactions in Cryptocurrency: Concept & Taxation

 

Virtual currency is getting popular across the globe & picking up in the Indian market as well. Cryptocurrencies like Bitcoin, Dogecoin, Ethereum, etc have resulted in a digital revolution & is increasingly used as a medium of exchange for online goods and services. Few companies like Microsoft, Tesla, Apple, etc have also started accepting it as a consideration against sale.

What is crypto currency?

Crypto currency is considered as a quasicurrency in digital forms and often termed as Digital Money. It is nothing more than a digital file which 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. The data suggests that there are more than 5000 traded crypto currencies across the globe. 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, crypto currency can be acquired through mining activity or by purchasing through exchanges or accepting it in exchange of goods or services.

Taxation of Cryptocurrency:

It may be noted that there are no clear cut specific guidelines and provisions for taxation of cryptocurrency and hence it will be governed by the existing provisions of 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 Scope of total income & section 2(24) defines the term “Income” which is inclusive in nature.  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 source) normally depends upon the activity, nature & motive of the assessee.  However, the same can be broadly summarised as under:

1. Any taxpayer accepting cryptocurrency against sale of its goods or services will be liable for taxation under the head “Income form Business” on the basis of fair market value of such currency. It will be required to be documented in the books of accounts as 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 source” or “Income from Capital Gain” depending upon the frequency, volume, intention & nature of the transactions.
   (b) The term “Capital Assets” has been defined in an inclusive manner 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).
3. Whether income from cryptocurrency can be considered Speculative Income u/s 43(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 commodity, stocks and shares and crypto is neither commodities nor stocks / shares / security.
4. Taxation in the hands of the persons who are involved in mining activities of cryptocurrency:
   Crypto miners are in the business of generating crypto assets using their computers, power, human resources, etc. and so it would fall under definition of business which includes any trade, commerce or manufacture or any adventure or concern in the nature of 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.
   (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.
   (c) The definition of Goods as given in Section 2(52) & Service u/s 2(102) of the CGST Act is wide enough so as to bring cryptocurrency in the net of GST. The definition of “Goods” as well as “service” excludes money and securities.
2. 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 ‘taxable supply” to be liable for GST.
3. Since cryptocurrency is not a recognised currency, 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.
4. Further, one may consider that the mining of cryptocurrency as an activity is done in furtherance of business and so any 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.

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