Crypto currency market has already got a great hype in international economy. Worldwide increasing popularity of crypto currency like BITCOIN is also having significant impact on Indian taxpayers who are investing in such crypto currencies. Now the question of taxability on crypto currency transaction is creating lot of confusion, since Indian tax laws are not having clarity on the same. Various experts have different views on taxation of crypto currency. Some opined the taxability as capital gains head treating the crypto as capital assets whereas some experts consider the income/ loss under the purview of other source head.
Recently Income tax department has issued tax notices on lakhs of high net worth individuals transacting in crypto currency, hence the issue of taxing crypto currencies has assumed more importance in India.
The Centre is reportedly planning to bring in a regulatory framework for crypto currencies in the forthcoming Union Budget. This should clear the status of such digital currencies and how they will be taxed. Meanwhile, here is a look at how transactions in crypto currencies may be treated and taxed under various laws and regulations.
- Whether Currency or not?
According to the Foreign Exchange Management (FEMA) Act, 1999, currency includes currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards and other such instruments, as notified by the RBI.
As various entities accept crypto currency as a mode of payment, it appears that it is a currency. But it has not been termed as a currency under the FEMA Act, or as legal tender by the RBI; so, it may not qualify as currency.
- Capital gain or business income
According to Section 2 (14) of the Income Tax Act, 1961, a capital asset means “a property of any kind held by a person, whether or not connected with his business or profession”. The term ‘property’ has no statutory meaning, yet it signifies every possible interest that a person can acquire, hold or enjoy.
So, crypto currencies could be deemed as capital asset if they are purchased for investment. Any gain arising on transfer of a crypto currency shall be taxable as capital gain. However, if the transactions in crypto currencies are substantial and frequent, it could be held that the taxpayer is trading in crypto currencies, and the income would be taxable as business income. The decision regarding quantum and nature of transactions to qualify as business transactions is a subjective matter and needs judgement to determine whether the gains are to be treated as Capital Gains or Business Income.
- Taxation of crypto currencies earned through mining
If profits earned from crypto currencies are taxable as business income, then the crypto currencies earned in the ‘mining’ process would also be taxable as business profits.
However, if crypto currencies are classified as capital assets, the virtual currency earned from crypto currency mining may not be taxed. Crypto currencies generated during the mining process are classifiable as self-generated capital assets. Since the cost of acquisition of such crypto currencies is not available, the taxpayer can take the benefit of judgement of the Hon’ble Supreme Court in the case of B. C. Srinivasa Setty (1981).
The court held that if the cost of acquisition of an asset cannot be ascertained, the machinery provision for computation of capital gains will fail. Therefore, no capital gains can be levied on transfer of such assets. This could mean crypto currencies generated through mining may escape from taxation in such a case.
- Location of crypto currencies for taxation:
Since transactions in crypto currencies are being carried out on international level, for determining the taxability, the source rule plays an important rule. Hence it is very much pertinent to determine the location of the crypto currencies.
Crypto currencies are intangible assets. For income tax purposes, location of an intangible asset can vary according to its nature and obligations attached to it. Location of an intangible property is decided on the basis of the law of the land where protection for the property is sought.
Location of an intangible asset can be linked with such tangible property with which it is most closely connected. For example, a patent is associated with plant and machinery, and a trademark or brand name is associated with goods. Thus, the Location of crypto currency can be linked with the country where its operating server is located. For Example, if Indian Government launches its own crypto currency “Laxmi”, the operating server of the same may be most probably in India and hence the location of this crypto currency will be in India.
- Is it goods or service – GST?
If crypto currency gets classified as a currency, it will be considered as ‘money’ in the CGST Act and no GST can be charged on its trading. However, exchanging crypto currency to rupees might be considered a service for the purpose of levy of GST under the category of ‘financial services’.
Here, if the supplier charges any commission for providing exchange services, then GST shall be payable at 18 per cent on the commission. If no separate commission is being charged for the services, the supplier shall be liable to pay GST at 18 per cent on 1 per cent of the gross amount of rupees paid by the recipient since consideration is inbuilt in the currency exchange transaction.
There is a conflicting view also. If crypto currency is not considered as currency, any trading in crypto currency may be considered a service. Therefore, the supplier (who is selling the crypto currency) may be required to pay 18 per cent GST on the total value charged by him from the buyer.
- Taxability of crypto currency mining under GST:
In the crypto currency mining process, individuals process the transactions and secure the network by using specialized hardware. In exchange, they are awarded new crypto currencies. In other words, the crypto currency is a consideration awarded to individuals in lieu of their services to secure the network. Therefore, crypto currency miners may be required to pay GST on the fair market value of the crypto currency at 18 per cent.