Before we start, let's understand what cryptocurrency is? Any person or institution of the world needs a currency to meet its basic needs and to promote mutual transactions so that it can use it smoothly. Therefore, each country has its own different currency, such as Rupee in India, Dollar in America etc. Actually, it is a physical currency that you can see, touch and use it in any place or country as per rules. But “Crypto currency” is different from that which is a digital currency. You can neither see it nor touch it, because crypto currency is not printed in physical form. Hence it is called virtual currency. This currency has become quite prevalent in the last few years.
Cryptocurrency has been under the limelight of the decade and inevitably attracted the attention of tax authorities due to the high prices at which they were seen trading on exchanges in India and around the world and determining the regulatory mechanism of taxation has to be determined looking at the current legal scenario.
How is the Government seeing this?
The Indian government is considering imposing a Goods and Services Tax (GST) on the trading of the world's most popular cryptocurrency -“Bitcoin”. The central government plans to impose 18% GST on the trading of Bitcoin. The annual turnover of cryptocurrency in the country has been estimated at around 40,000 crores. The government is expected to get Rs 7200 crore of revenue every year by imposing 18% GST on it, the Central Economic Intelligence Bureau (CEIB), working under the Ministry of Finance, has proposed to the Central Board of Direct Taxes and Customs (CBIC) that the government can get Rs 7,200 crore annually from bitcoin trading in the country. CEIB has suggested a study to impose GST on cryptocurrencies.
According to Finance Ministry sources, CBIC has suggested that bitcoin can be classified under the “Intangible Assets” class and GST can be levied on all its transactions. According to TOI news, CBIC has suggested that Bitcoin can be considered as a current asset and GST should be levied on its trading margin.
How tax can be imposed?
The bitcoin tax depends on your holding. The first thing to look at is whether you are trading or holding as an investment. If it is an investment, you have to pay tax on capital gains. If you are buying bitcoins, it is business income. If your turnover is more than 2 crores, then you have to get a Tax Audit. The Income Tax Department has not made any classification in Trading and Investment. You have to look at the duration, the frequency of the transaction, the time it takes, and the intention of the transaction. All this shows whether it is investment or trading.
➤ Tax on Cryptocurrency as Capital Gain Tax
Capital gain under IT Act u/s 2(14), is defined as “a property of any kind held by the assessee whether or not connected with his business or profession”. Many tax experts are advising their clients to show their earnings from bitcoin as capital gains, which is based on the earnings from the shares. Although the RBI has banned cryptocurrencies, most investors have retained bitcoin and other cryptocurrencies. A few months ago, when bitcoin started picking up, some investors bought more currency. Therefore, any gains arising out of the transfer of cryptocurrency must be considered as capital gains, if they are held for investment.
If investors hold cryptocurrency for 36 months or longer, the profit will be taxable as a long-term capital gain (LTCG), and for less than 36 months, it will be a short-term capital gain (STCG).
The Short-term capital gains are taxable as per the slab rates applicable to the taxpayer while the long-term capital gains are taxed at a flat rate of 20% with the benefit of regulation.
➤Tax on Cryptocurrency as ‘Profit and Gains from business and profession.’
The bitcoins being received will be treated with the receipt of money. This will constitute income in the hands of the recipient.
Further, since the recipient receives this income from a business or profession, he will be taxed under the head profits or gains from the business or profession. As such the income tax return form lacks clarity regarding the requirement of disclosure of bitcoins.
➤ Cryptocurrency as Goods
If the cryptocurrency is treated as commodities/goods or assets then that means the supply of bitcoins is a 'taxable supply' and is therefore subject to GST.
Technically, the supply of cryptocurrency in the form of goods or property in exchange for other virtual/real goods should fall within the scope of 'barter transactions', as bartering is simply the exchange of one good for another.
If cryptocurrency is considered as good then some transactions would be subject to twice taxation. First on supplies (otherwise exempted for money transactions) and second on consideration, leading to unnecessarily high taxes. This high incidence of taxation puts businesses dealing in cryptocurrency at a huge downside which also reduces their purchasing capacity. The issue becomes more complex in cases of international transactions.
Rules have yet not been made to bring cryptocurrency to tax. If the Revenue Department issues a clear circular in this regard, it will clear the matter. Taxing bitcoin or cryptocurrency is a very complicated matter. There are no more laws or decisions in this matter.
But in view of today’s world, India’s digital infrastructure can be promoted by Cryptocurrency and it also has the ability to secure all transactions done on digital networks. In this situation, taxation on cryptocurrencies should be considered a welcome step and should not be seen as a restriction.
It is a mutual concession track for crypto transactions to be used legally as well as generating income for the government for its efficient use. It has also been emphatically stated that applying the tax on cryptocurrency as a policy matter can help provide an ideal environment for traders to believe that their money is safe and the risks involved in trading Are reduced. Currently there is no regulator for cryptocurrency, and hence there is also fear of it being used for big time-money laundering and weakening of legitimate currencies.