Is Income Tax & GST Applicable on Cryptocurrencies?
Cryptocurrencies are one of the fastest-growing digital assets. A cryptocurrency is a digital currency designed to work as a medium of exchange or can be used as a form of payment online for Goods & services or can be traded on the cryptocurrency exchange. Few famous cryptocurrencies – Bitcoin, Dogecoin, Ethereum, Binance coin, XRP, Tether, etc.
These currencies work using a technology called the blockchain. Blockchain is a technology spread across many computers that manage and record transactions, this structure makes it decentralized which allows it to exist outside the control of government & central authorities.
Different Ways to acquire cryptocurrencies
Mining – It is a process in which new tokens(crypto coins) are entered into circulation. These coins are given as rewards to individuals(miners) who use their computer’s capabilities to solve extremely complex computational problems. This process of solving such problems which are integral to blockchain technology helps in maintaining them.
Bitcoin is the most famous crypto which is mined throughout the world. Bitcoin mining in China accounted for 70% of the world’s total capacity. However, recently China has banned mining Crypto in an attempt to reduce carbon emissions.
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Trading cryptocurrencies on different Exchanges – Another option is to trade different coins on various Exchanges like Coinbase, Binance, WazirX, Coindcx, etc. One can buy different coins against the real currency & store them in their crypto Wallets. Trading in crypto is similar to trading in Stocks.
Receiving cryptocurrencies in consideration of selling goods & services – In most Countries, crypto coins are not legal tender so it is uncommon for businesses to accept them as consideration. However, there are few major companies that accept cryptocurrencies as consideration. For example – Microsoft, Starbucks, Elon musk’s Tesla also started accepting Bitcoin but currently not accepting due to environmental concerns.
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The legality of Cryptocurrencies in India
In India, there are no set of rules, regulations, or guidelines for cryptocurrencies. Also, it is neither authorized as a medium of payment nor regulated by any authority. However, one cannot say that Cryptocurrency is illegal in India. As RBI decided to remove a 2018 rule that forbids banks from facilitating cryptocurrency trades. The RBI said ”The circular is no longer valid from the date of the Supreme Court judgment, and therefore cannot be cited or quoted from,”
Therefore Transacting in Cryptocurrencies is 100% legal in India & the new RBI circular clearly confirms it.
Taxation of Cryptocurrencies:
Applicability of GST on Cryptocurrency?
Determination of the applicability of GST on Cryptocurrencies is a debatable topic as there is a lack of clarity as to treat these digital coins as assets or securities in India.
Supply of Goods or Services or both is a taxable event under GST.
Both Goods & services Exclude Money & securities from their definition.
Cryptocurrency doesn’t Exist in Physical form. it is not money because it is not Legal tender in India. Nor it is covered under the definition of securities.
From the above point, CryptoCurrency which is neither money nor security then it may fall under the definition of Goods or services. Hence it may Attract GST on its supply.
Also, there are many overseas Crypto Exchanges that allow Indians to invest in these virtual coins. However, there is no GST levied on the Services Provided by these Exchanges.
The Government may soon start collecting GST from these exchanges on the Commission they charge on the Services provided by them.
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Applicability of Income Tax on Cryptocurrency?
The Taxation on cryptocurrencies should depend on the nature of Investments, whether it is held as Currency or as assets.
Gains from selling Cryptocurrency can be taxed as business income if traded frequently & if held for Investment purposes then such gains can be taxed as Capital Gains.
However, it’s up to the income tax authorities to decide whether to consider Crypto coins as Capital Assets or not. If these Cryptocurrencies are not considered Capital assets then any Gains arising from them will be computed under the head ‘Income from Other sources’ then the taxpayer will have to pay taxes as per the applicable slab rates. And;
If Income tax authorities consider it as a Capital asset then it will be taxed as per the tax rates applicable on LTCG & STCG.
Let’s discuss few circumstances looking at the possibility of a tax on gains from the transfer of Cryptocurrencies:
Mining: Crypto coin generated through mining is a Self-generated asset. The sale of such assets will give rise to Capital gains. But Section 55 of The Income Tax Act, 1961 does not recognize crypto. Hence its cost of acquisition & improvement cannot be ascertained as per this provision due to which the mechanism of computing capital gains fails.
However, as per few Experts in the case of Crypto generated through mining, the Cost of Acquisition can be taken as the price of that particular coin at the time it was mined.
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Crypto Currencies held as an Investment: If Crypto Currencies are Held for Investment Purpose & later on these assets are transferred for real currencies & any gain that will arise from such transfer will be considered as Long term Capital gain or short term Capital gain depending upon the holding period of such Crypto coin.
Here is an example for better understanding:-
Mr. X bought a Bitcoin for Investment purpose
|INR value 1 Bitcoin (BTC) at the time of purchase||Rs. 30,00,000|
|INR value 1 Bitcoin (BTC) at the time of Sale||Rs. 52,00,000|
|Capital Gain||Rs. 22,00,000|
Now, if Mr. X Held this BTC for more than 36 months then the Gain at the time of Sale was Rs. 22,00,000 then it will be Long term Capital gain & it will be taxed at @20%.
If Mr. X Held this BTC for less than 36 months then the Gain at the time of Sale was Rs. 22,00,000 then it will be short-term Capital gain & it will be taxed according to the applicable slab rates.
Crypto held as Stock in Trade: Any income arising from the business in which Crypto is held as stock & the Gains from the trading/transferring it will be taxed at applicable Slab rates.
Crypto Currencies received as a Consideration on Sale of Goods & services: these digital currencies if received by a business as consideration for sale shall be treated on Par with receipt of money. It will be considered as income out of business in the hands of the receiver. & will be taxed as per applicable tax rates.
Disclosure on Income from Cryptocurrencies
Taxpayers having a total taxable income (after all the deductions) of more than Rs. 50 Lakhs yearly are required to disclose their assets & liabilities in the Schedule of assets & liabilities along with its cost of acquisition. These requirements are for the taxpayers who are eligible to file ITR 2 or ITR 3. Since Cryptocurrencies can also be considered as assets the taxpayers will have to include those in the above schedule.
With an exponential growth in Information technology & the E-commerce industry. In 2006, the Indian Government introduced an Equalisation levy with an aim to impose taxes on digital transactions i.e. income accruing to foreign companies from advertising services or from providing any digital advertising space or facilities/ service for the purpose of online advertisement or from any services that will be notified by Government.
How can it Impact crypto?
In the last few months due to the sudden boom in the price of bitcoins & the billionaire Elon musk backing Dogecoin has made Cryptocurrencies a trending topic everywhere.
Various foreign Cryptocurrencies exchanges are now available in India which makes it easier for a person in India to Invest or trade in Cryptocurrencies. These Exchanges outside the country were not paying this levy. But now the Indian government has expanded the scope of this Levy & it may soon apply on Cryptocurrency exchanges.
The Income tax department is looking into whether the 2% equalisation levy is applicable on Cryptocurrencies bought by Indians from the crypto exchanges located outside the country.
It may lead to Increase in the cost of buying cryptocurrencies as their prices are volatile. A substantial increase in price will have a major effect on the cost.