Tax on Cryptocurrency

While cryptocurrency is an investment option and is becoming popular in India with each passing day, the digital currency needs to be discussed from the view of a global tax perspective. This novel transnational currency has led to the rise of some massive tax opportunities for several countries and governments, along with international economic bodies who have a pragmatic approach towards cryptocurrencies.


Cryptocurrency is a virtual currency with a global market capitalization of around $2 trillion. While physical money is as charming as the digital currency, the greed for an alternative investment opportunity, further fueled by the pandemic hit economy has been one of the prominent reasons behind the astounding rise in the valuations of cryptocurrency in the past 12 months.

While cryptocurrency is an investment option and is becoming popular in India with each passing day, the digital currency needs to be discussed from the view of a global tax perspective. This novel transnational currency has led to the rise of some massive tax opportunities for several countries and governments, along with international economic bodies who have a pragmatic approach towards cryptocurrencies. With several macro-level issues related to policy and other legal, tax and regulatory aspects, more clarity is required in this area throughout the globe. The underlying technology, i.e blockchain, also needs to be adequately leveraged and explored to usher a transition towards a digital economy.

Cryptocurrency can be described as a digital representation of the value which is secured using cryptographic methods. The cryptocurrencies are recorded, transferred, and stored electronically using distributed ledger technology. If explained simply, cryptocurrencies can be termed as electronic peer-to-peer currencies.

The idea of cryptocurrency gained attraction only after the 2007-2008 global financial crises, which led to the introduction of the cryptocurrency names Bitcoin. The basic idea behind the cryptocurrency is to create a currency movable without a central authority, i.e. a central bank of a country. To ensure that the system of cryptocurrency was adequately regulated, it was necessary to ensure that the blockchain technology and related infrastructure on which the cryptocurrency is based has an in-built trust mechanism and that the data and information entered on such networks remains immutable and tamper-proof.

The key technological aspects of cryptocurrency are as follows:-
  1. Distributed Ledger Technology (DLT) - DLT refers to a distributed network of participates who use an independent computer, also termed as node, which records, shares, and synchronizes information , special transaction or data, independently in their respective electronic ledgers.
  2. Cryptography: This method is of sending secured information between two or more participants, essentially involving conversion of information available in plain ordinary text into unintelligible text, known as encryption, and vice versa, known as decryption. Cryptography for cryptocurrencies is used as a means to secure and authenticate the information stored on a DLT. The idea behind cryptocurrencies is to eliminate involvement and need of a central regulatory authority, thus, the cryptographic methods are used in order to secure and authenticate the information related to cryptocurrency, which boosts the trusts of the participants engaging in transactions of cryptocurrency.
  3. Blockchain: Blockchain is a substitute of DLT and one of the most commonly used DLT. It is essentially a chain of blocks by each block is linked to the previous one. Each block contains information on transactions like timestamp, value etcetera. These transactions are those which take place on the block chain DLT and which have been cryptographically authenticated by the participants on the DLT. As per the World Economic Forum, the blockchain technology can be hailed as one of the seven revolutionary technologies that has the potential of revolutionizing the various aspects of human life.
  4. Mining: Information related to cryptocurrencies and their transactions is needed to be authenticated using cryptographic methods before it is stored on a DLT. Mining is the process of deploying computers to cryptographically authenticate such information being recorded on a DLT. However, not every participant on a DLT maybe interested in authentication of information and may merely be interested in transacting in cryptocurrency. Therefore, to ensure that the transactors/participants are adequately incentivized for authenticating their information, rewards in the form of cryptocurrencies are given to such participants. Successful authentication of information using cryptographic methods makes the participant doing it a “miner”.

India has maintained a cautious and conservative approach towards cryptocurrencies, but it will definitely evolve over the years. Viewing from a tax perspective, no clear guidance seems to come in view as to how the crypto-related gains need to be taxed and what would be its proper categorization under the various direct and indirect tax laws.

Since the time Bitcoin and other concept of cryptocurrency have started gaining traction in India, the Reserve Bank of India along with the Indian government has successfully and consistently taken cautionary measures. The Reserve Bank of India had warned the Indian public about uncertainties related to cryptocurrencies. In 2018, the RBI had issued prohibition or Indian banks facilitating any transactions in cryptocurrencies. Further, in 2019, in inter-ministerial committee was set up by the Indian government that also recommended that all private crypto currencies except official digital currency issued by the state should be banned in India.

However, since then, the legal landscape and perception of India with regards to cryptocurrencies evolved. The provision of RBI as mentioned above was set aside by the Supreme Court in 2020. This was arguably a watershed moment for India’s crypto currency ecosystem. Yet, the statements made by the Indian government and the various financial regulators time to time indicates that the future of cryptocurrencies in India is uncertain due to lack of regulatory perspective.

The basic and foundational step required to be undertaken for imposing tax on cryptocurrencies is their characterization. It remains open for discussion if cryptocurrency falls within the definition of a traditional currency or whether it should be, for the sake of brevity, classified as an intangible asset, considering the investment point of view. This point of discussion has become more poignant as recently, El Salvador recognized Bitcoin as its legal tender, giving birth to the argument that bitcoin can fall within the definition of foreign currency.

For understanding the tax perspective of cryptocurrencies, we need to look at the taxable events in relation to them which can be broadly divided into the following two categories:-
  1. Events leading to creation or generation of a cryptocurrency
  2. Events relating to the secondary disposal of a cryptocurrency.
Let us discuss the tax implications for each taxable event with respect to Indian taxation regime.

  1. Mining- If the activity, as explained above, is undertaken with the intention of earning profits, i.e. with a business motive, then the rewarded cryptocurrency is taxable as a business income. However, if the activity of mining is carried out casually or as a hobby, then the same needs to be evaluated if the rewarded cryptocurrency can be characterized as an ordinary income or as a non-taxable capital receipt. In this case, for the income to be characterized as ordinary income, the test is whether the cryptocurrency falls within the ambit of security. This is so because under the Indian law, receipt of a security for nil or inadequate consideration gives rise to a taxable event for the recipient of such security.
  2. Initial Coin Offering- In consonance with the concept of initial public offering in a company, an initial coin offering is an event where a new currency is issued in exchange for one of the existing major cryptocurrencies like Bitcoin or Ether or in some cases, even exchange in exchange for flat currencies. An ICO is a commonly used method for raising funds for a new project in the crptocurrency space. In the absence of a specific taxing provision for such event in relation to cryptocurrencies specifically, the existing legal and tax provisions related to primary issuance of shares will not be attracted.
  3. Airdrop: This refers to that event where a cryptocurrency is given or distributed without any consideration to a selected set of people like, like celebrities, public figures or influencers, for the purpose of increasing awareness about cryptocurrencies. This method is usually adopted in order to launch new cryptocurrencies in the market. One of the recent examples of airdropping was when more than 50 per cent of the Shiba Inu in circulation, which is a fairly new cryptocurrency launched in 2020, was donated to Vitalik Buterin, the co-founder of Ethereum. When the distribution is done to celebrities and influencers, the receipt of cryptocurrencies via airdrop is taxable in same manner as the fee received for the promotion of brand awareness, i.e. it would be taxable as business income. However, in case of public figures receiving cyrptcurrenices through airdrop, since they are not carrying out any business of brand awareness or marketing, and the airdrop of cryptocurrencies is done in expectation of no service in exchange, then the receipt is taxable as an ordinary income provided cryptocurrency falls within the definition of security.
  1. Mined Coins: Where the secondary sale of the cryptocurrency relates to the mined cryptocurrencies, the gains arising from the disposal of such mined cryptocurrencies shall be taxable as a business income, if the activity of mining was carried out for business purposes, for earning profits. In any other case of a mined coin, the gains arising out of the secondary disposal of such coins that are mined without the intention of profits shall be taxable as capital gains. However, the argument may arise that no capital gains tax should be levied in cases of mined coins since no cost of acquisition of such an asset can be determined, which result in the failure of the machinery of provisions will create for the purpose of computing capital gains. Yet, the tax authorities might present a counter argument that the computing cost, electricity cost, etc incurred in the process of mining of the cryptocurrency should form the acquisition cost for computing such capital gains.
  2. Coins other than those mined: In cases of coins that are not mined, it needs to be evaluated whether the gains arising from the secondary disposal would be taxable as business income or capital gains, as may be applicable according to the facts of the case.
  3. Exchange of Cryptocurrencies for Goods/Services: In cases when cryptocurrencies are held for a period of time, during which its value increases or decreases and thereafter, it is exchanged in return for any goods or services, the gains earned or the losses suffered during such holding period, before the cryptocurrency is exchanged for a good or service, will be subject to taxability as they result in a taxable event. The tax implications relating to such gains are same as in the case of a secondary disposal as mentioned above.

Any form of exchange, including that of a cryptocurrency, can be broken down to two perspectives- consumption and payment. The nature of exchange and the parties to the exchange decide if the transaction would be dealt with in the Income Tax Act 1961, the Goods and Service Tax Act 2017 or any other law.

Taxes are classified under two classes, direct taxes and indirect taxes. We can separate them dependent on their execution. Direct taxes are paid by an individual or entity while indirect taxes are exacted on goods and services.

In the direct tax system, the treatment of advanced types of cash (for example Digital money) under the direct tax framework is basically controlled by the Income Tax Act, 1961 in India. In the present legitimate situation, there is no conviction concerning the expense evaluation from neither computerized cash nor bug revelation essential for the compensation acquired by the Income Tax Department.

Continuing ahead, if advanced cash is considered as 'cash', it would not be open to burden according to the Income Tax Act. The principle clarification being, under this establishment, the significance of 'pay' is a thorough one, which contains the 'normal' which implies yet also the things referred to under Sec 2(24) of the IT Act. Be that as it may, neither the customary significance nor Sec 2(24) of the IT Act consolidates 'money' or 'cash' as pay, despite the fact that it joins 'monetary portion'.

Likewise, being a strategy for figured, the cost recurrence would be on the trade and not on the Currency. Of course, if computerized money is considered as product/property, by then obviously it would be either covered inside the charging game plan of 'Benefit and Gains from Business and Profession'.

It would not be unusual to communicate that the ambit of the word 'pay' isn't restricted to the words 'advantages' and 'gains' and anything which can fittingly be relegated as 'pay' is in danger to be troubled under the IT Act, with the exception of if expressly absolved.

Assuming it is treated as capital addition, there is an uncommon arrangement under Section 2(14) of the Income-charge Act that portrays a capital asset as "property of any kind held by the assessee whether related with his business or calling". This significance of 'capital asset' is most noteworthy in itself and covers a wide scope of property beside those unequivocally stayed away from under the Act. In this manner, if they are held for speculations any augmentations arising out of the trading of advanced cash ought to be considered as capital increments.

In the indirect tax regi,e, the treatment of digital currencies when held as 'stock in return' isn't the one which faces huge difficulties as the issues arising while simultaneously viewing it as capital increases don't arise when such cryptographic types of cash are held in help of monetary movement.

Under Section 2(13) of the Income Tax Act, the importance of 'business' is far reaching, and contains "trade, exchange or create or any experience or stress of such nature." Moreover, any tenacious development like trade computerized monetary standards is joined inside this definition, and advantages recognized are accessible thereunder, chargeable under Section 28 of the Income Tax Act. The advantages may not be as cash, they are available whether or not they are any sort.

The treatment of digital money as items/property gathers that the store of bitcoins is an 'accessible stock' and along these lines subject to GST. A store of advanced cash as product or property as a trade-off for other virtual/real items should fall inside the ambit of 'exchange trade' since bartering is only an exchange of one use for another.

Prior to GST, under the distinctive state Value Added Tax laws, the pace of cost arose when there was a give of items as a tradeoff for cash, surrendered portion, or another significant thought. The verbalization of 'some other huge idea' leaves out a wide degree of unclearness, since the term should ordinarily decide reference, ejusdem generis, from its previous term "cash and conceded installment".

This view was underlined by the Allahabad High Court because of Sales Tax Commissioner versus Ram Kumar Agarwal, where a trade of gold bullions as a trade-off for designs was denied from the importance of deal under Sec 2(h) of the Sale of Goods Act, 1930. Regardless, the position resembles when a trade is used as a device to conceal cash related idea, courts might loosen up the device to consolidate it inside the ambit of offer.

A strategy where digital forms of money are stock suggests that a couple of trades would be troubled twice – from the start on stock (cleared for a trade in real money) what's more on idea, senselessly inciting higher obligation. This higher event of expense assortment puts the associations working in digital currencies at a monster obstruction which in like manner decreases their purchasing limit. The issue gets also tangled in worldwide trades.

It's undeniably true that citizens having a pay over Rs 50 lakh yearly are needed to reveal their resources and liabilities in the Schedule of Assets and Liabilities, alongside cost of obtaining. Since digital currencies can likewise be considered as resources, citizens additionally need to remember those for the above plan.

Moreover, citizens who are inhabitants and common occupants additionally need to uncover unfamiliar pay and resources in their expense forms.

In the event that we additionally think about the assessment and corrective results under the Act and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, it could be a decent advance for citizens to reveal digital currency property in the unfamiliar resources or Income Schedule.

There are no authority declarations or rules till now about the reception of cryptographic money and assessment burden on it. Consequently, we need to hang tight for government rules for additional insights concerning tax assessment on digital money.

The digital currency in the current circumstance can help the establishment of India's high level structure and ensure pretty much every one of the trades made on the mechanized organization. Digital forms of money, at this point, have not been given the situation with legal sensitive in India by the RBI. In this way, there are no unquestionable standards describing taxability with respect to bitcoins, which requires an unequivocal clarification from the IT office. In the current situation, demanding costs on the trades including advanced cash should be seen as an intriguing move and should not to be seen as a restriction. It is a two-way street for the digital currency trades to be followed and used legitimately similarly as delivering pay for the public position to be used beneficially. It is moreover strongly verified that using charge on digital currency as a game plan matter can help with giving an ideal climate to ensure the sellers that their money is secured and the perils drew in with trading are similarly mitigated.