Digital currency or crypto assets has gained more popularity recently. Many people prioritize investment in digital currencies due to their excellent security and transparency. Digital currencies are mainly wielded as means of investments and, in some cases, as a medium of payment for goods or the receipt of services. 

A significant amount of increase in crypto investors worldwide has been observed after the lockdowns. According to the report, in 2021, an addition of over 10 million crypto investors has been recorded in India.  

Since cryptocurrencies are not issued or governed by any central authority, government interference is negligible. If you are planning to invest in cryptocurrency, here are the possible tax implications on crypto investments in India. 

How is Cryptocurrency obtained or developed?

There are majorly three methods to generate cryptocurrency: 

• Mining

Mining implies that – an individual/miner employs computing technology to solve complex algorithms, codes or equations to derive coins/tokens. This data is recorded on the blockchain. One can receive payments in the form of new crypto tokens in exchange for this work.

• Buying

Cryptocurrency can be purchased from exchanges using fiat currency. These can be stocked in an online currency wallet.

• As legal tender

Cryptocurrency may be employed in business as well. It can be used for the sale of goods and services rather than fiat.

The legality of Cryptocurrencies in India

In 2018, a circular was issued by the Reserve Bank of India (RBI), which prohibited crypto-related transactions in India. However, the decision of the RBI was turned down by the Indian Supreme Court in March 2020.

Recently in 2021, the government has recently put forward a new bill in parliament regarding Cryptocurrency and Regulation of Official Digital Currency Bill. However, the final decision is pending.

Tax implications of Cryptocurrency in India

There is a lack of clarity in respect of rules or guidelines about taxability for cryptocurrencies. Specific clarification from the Income Tax (IT) department is required for any tax implementation on cryptocurrency.

Source

Certain experts have assumed that cryptocurrency transactions can be taxed under some possibilities of the Income Tax Act 1961 and the Central Goods and Services Tax (CGST) Act, 2017 (depending on the transaction). The Ministry of Corporate Affairs (MCA) has already notified certain guidelines, which makes it compulsory to reveal details about transactions related to crypto-assets or cryptocurrency investments by companies in the relevant financial year.

Taxation under the Income Tax Act

Profits and gains – business/profession

Transactions which include receipt of cryptocurrency against goods and/or services and any sale/purchase of cryptocurrency as stock in trade are subject to tax as per the Section 2(13) of the Income Tax act.  

Additionally, profits realized on any continuous activity – like trading in cryptocurrencies are chargeable under Section 28 of the Income Tax Act.

Income from other sources

Income from mining, trading for investment and receipt/voucher of cryptocurrency as gifts are taxable under the Income Tax Act under the head – Income from other sources.

• Generation of Cryptocurrency through mining

Accumulated digital currency will be considered as self-generated assets, but the taxation procedure is not fixed yet. There’s no clarity for the application of provisional capital gains. Experts suspect that currency obtained through mining will be evaluated under the category of income from other sources. However, Section 55 of the Income Tax Act handles the acquisition cost, which does not recognize mining.

• Receiving Cryptocurrency as a gift

Cryptocurrency received as a gift falls under the category of income from other sources and is likely to be taxed at individual slab rates. That means any cryptocurrency received as a gift shall be entirely taxable if its worth is INR 50,000 or more. 

• Exemptions from tax liability 

Some exemptions from tax on gifts received can also be applicable to cryptocurrency. For example, gifts received from relatives, or those received on the occasion of marriage, under a will and by way of inheritance can be considered tax-exempt.

Salary and income from house property

Since the government has not yet recognized cryptocurrency as a legal tender, employers are not eligible to make salary payments using any digital currency. Also, payment of rent using digital currency is not acceptable.

Capital Gains

Section 2(14) of the Income Tax Act defines a capital asset, and it includes all kinds of property held by the assessee. Hence, any profit that arises from the transfer of cryptocurrency is considered to be capital gains. It depends on the holding period to determine whether the gains are long-term capital gains – (20 per cent tax post indexation) or short-term capital gains (taxed according to individual slab rates).

Taxation as per the Central Goods and Services Tax Act

Every crypto trading activity can be taxable as per the guidelines of the CGST Act.

Indian crypto exchanges pay GST to the government, along with their other general tax payments. The government considers this as an indirect tax on the trading charges (for exchanging or buying digital currency like Bitcoin, Ethereum, Tether, etc.). 

The Central Economic Intelligence Bureau (CEIB) has recently put forward a proposal to the Central Board for Indirect Taxes and Customs (CBIC) to recognize cryptocurrency exchanges and platforms under the GST purview. 

It is suggested that cryptocurrency mining must be considered as a supply of service since it generates cryptocurrency with a chargeable transaction fee. This can be evaluated as an intangible asset that attracts a GST of 18 per cent. The CEIB has proposed that the taxpayers acting as cryptocurrency miners must be registered under GST if their annual revenue exceeds INR 2 million. GST could be applicable on the transaction fee reward on the currency mined.

There are chances that foreign crypto exchanges in India may be charged a GST of 18 per cent on transactions with a 2% of equalization levy. The Indian government is planning to include foreign crypto exchanges operating in India under the definition of Online Information Database Access and Retrieval (OIDAR) services.

Final Thoughts

Considering that crypto transactions are gradually picking up in India, it is better to have an official communication that confirms the legality and taxability of bitcoins and other cryptocurrencies.