The cryptocurrency space in India has been subject to significant regulatory challenges. It started with a circular issued by the Reserve Bank of India on 6th April 2018, which restricted banking facilities from being offered to participants involved in cryptocurrency transactions. In March 2020, the Supreme Court set aside the RBI circular, on constitutional grounds and affirmed the virtual currency exchanges’ fundamental right to trade. It is estimated that around 5 million traders in India traded across 24 exchanges, with trading volumes in the range of 1,500 Bitcoins a day translating to a volume of Rs 1 billion. According to moneycontrol.com, the trading volume of cryptocurrency in India increased by 400 percent during the nationwide lockdown.
On 24th March, 2021, in what could possibly mark the first move by the government to regulate cryptocurrencies and related transactions in India, the Ministry of Corporate Affairs has made it mandatory for companies dealing with virtual currencies to disclose profit or loss incurred on crypto transactions and the amount of crypto currency they hold in their balance sheets at the reporting date. These amendments were made in schedule III of the Companies Act with effect from April 1, 2021.
The Indian income tax law is still unclear regarding the tax impact on the gains earned from cryptocurrencies. It is worthwhile to note that India’s tax authorities have not yet categorized returns from cryptocurrencies under any specific bracket and there have been no judicial precedents in this regard.
To understand the taxability of the cryptocurrencies, one should examine the classification of cryptocurrency i.e. is it currency or goods/property?
How are tax cryptocurrency transactions in other countries?
USA: The Internal Revenue Service in 2014 decided cryptocurrencies should be treated as “property”, meaning they should be taxed as capital assets other than in situations when cryptos are earned from mining activities.
Singapore: Businesses that trade virtual currencies in the course of their business are taxed on profits as business income. Entities holding cryptocurrencies for long-term investment purposes are not taxed as there is no capital gains tax in Singapore.
UK: If a person buys and sells crypto assets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade, then it will be taxed as trading profit/losses, else it will be subject to capital gains tax.
Taxation of cryptocurrency transactions in India
If cryptocurrency is to be classified as currency, then the said transaction will not be exigible to taxation under the Income Tax Act, 1961 (“ITA”). Cryptocurrencies are not recognized as currency by the RBI and the word ‘income’ as defined under section 2(24) of the ITA provides an inclusive list not covering ‘money’ or ‘currency’. On the other hand, if cryptocurrency is considered as property/goods, then it would fall under the heads of either ‘Capital Gains’ or ‘Profit and Gains from Business or Profession’.
The fact that crypto currency gains will be taxed is now certain with the Minister of State for Finance, Mr. Anurag Singh Thakur clarifying on 28th March 2021 that “the gains resulting from the transfer of cryptocurrencies / assets are subject to tax under a head of income, depending upon the nature of holding of the same”.
Thus, it is settled that cryptocurrencies will not be treated as currency by India and will be exigible to tax. The key issue is whether income from virtual currency is treated as capital gains or business income. If a seller is a trader by occupation, the income should be taxed as business income. If it is not business income, such income would be taxed in the nature of capital gains.
Taxability under ‘Capital Gains’
Crypto currency can be deemed to be a capital asset if it is purchased for the purpose of investment by a taxpayer. As per Section 2(14) of the ITA, 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’, though has no statutory meaning, yet it signifies every possible interest which a person can acquire, hold or enjoy. Therefore, any gain arising out of the transfer of cryptocurrency may be considered as capital gains, if it is held for investment.
Infrequent crypto transactions could be treated as long or short-term capital gains, depending on the holding period. If investors hold cryptocurrencies for 36 months or more, the gains would be taxable as long-term capital gains, and if less than 36 months, it would be short-term capital gains. Short-term capital gains are taxable as per the slab rates applicable to a taxpayer. And long-term capital gains are taxed at the flat rate of 20% with the benefit of indexation.
Taxability under ‘Profit and Gains from Business or Profession’:
However, if the transactions are substantial and frequent, it could be held that the taxpayer is trading in cryptocurrencies and any profits thereon would be taxable as business income. Similarly, if cryptocurrencies are held as ‘stock in trade’, then income arising therefrom will attract tax under business income. Therefore, the continuous activity of trading in cryptocurrencies and profits realized will be taxable as business income. Although a position can be taken by the revenue authorities that such trading is treated as speculation income which would adversely impact taxpayers.
In conclusion, virtual currencies can boost India’s digital infrastructure and reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance. We still need clarity from the government on cryptocurrency taxation, particularly on issues such as treatment of capital gains or business income, classification as speculative income, allowability of set-off, and carry-forward of losses, and applicability of deemed gift tax provisions.
(The author, Harsh Bhuta, is a Partner at Bhuta Shah and Co LLP. The views are his own)