This article as well as the embedded video lecture attempts to address the basic questions concerning cryptocurrency in India, in the most layman terms.
Digital ‘crypto-currency’ or ‘crypto assets’, including stablecoins and tokens, are a form of decentralized digital money, based on blockchain technology – a distributed ledger enforced by a disparate network of computers. Ranging from decentralized digital tokens, such as Bitcoin, to official, sovereign-backed, central bank digital currencies – digital currency has found increasing acceptance as well as enthusiasm among its users.
These digital currencies aim to emulate the uses of traditional money as a means of payment, a store of value, and a unit of account. These crypto assets are being bought and sold for varied purposes. While they are being mined (earning cryptocurrency by solving cryptographic equations with the use of high-power computers) by some, others are using them for buying goods and services. Cryptos have gained popularity as an investment as well, where people are investing in them with a view to earn profits on appreciation of these cryptos. Since they are not issued by any central authority, these cryptocurrencies are immune from government interference and manipulation for now.
As of 2021, there were over 6,000 different cryptocurrencies in circulation worldwide, including the market giants Bitcoin, Ethereum, Litecoin, and Dogecoin. Despite the exponential increase in the number of digital currencies, 90 percent of the market is claimed by the top 20 cryptocurrencies. Reports suggest that while Bitcoin, as of now, makes up around 45 percent of the total global crypto market cap, Ethereum constitutes 17 percent of the total crypto market valuation accounting for US$458 billion.
As of October 2021, the market capitalization of all the cryptocurrencies put together stood at US$2.5 trillion. In the beginning of 2021, the total market capitalization of cryptocurrencies was around US$830 billion. Since then, the valuation has witnessed a substantial growth of 233 percent with crypto tokens like Bitcoin, Ethereum, Binance Coin, and Cardano emerging as the most popular tokens.
Cryptocurrency in India: Trends
As per data from crypto research and intelligence business CREBACO, Indian crypto investments have surged to over US$10 billion from US$923 million in April 2020, mainly driven by a shift in the thinking of young investors – moving away from gold and other precious metals. Another reason is the security and transparency provided by this technology.
According to the CREBACO, over 105 million people, which is 7.90 percent of India’s total population, currently own cryptocurrency. This is noteworthy in light of the impending bill in the parliament which indicated that the federal government intends to impose a ban on the use of private cryptocurrency in India. However, nothing can be said conclusively unless the law regulating the digital currency is tabled and passed as there remains ambiguity regarding definition of private cryptocurrency.
How is cryptocurrency acquired or generated?
Cryptocurrency can be generated in the following ways:
- Mining: “Mining” crypto is when an individual miner uses computing technology to solve complicated algorithms/codes/equations and record data on the blockchain. In exchange for this work, one may receive payment in new crypto tokens.
- Buying: Buying it from currency exchanges using real currency and storing it in an online currency wallet in digital form.
- As legal tender: It can be used as a consideration for sale of goods and services, instead of real currency.
Tax implications of cryptocurrency in India
The Reserve Bank of India (RBI) has not yet granted Bitcoin or any other cryptocurrency the status of legal tender in India. Hence, there are no clear rules or guidelines defining taxability for cryptocurrencies, which calls for specific clarification from the Income Tax (IT) department.
However, experts have speculated upon various possibilities in which cryptocurrency transactions can be taxed under the Income Tax Act 1961 as well as the Central Goods and Services Tax (CGST) Act, 2017 – depending on the type of transaction. Meanwhile, the Ministry of Corporate Affairs (MCA) has made it mandatory for companies to disclose cryptocurrency trading/investments during the financial year.
Taxation under the Income Tax Act
Here is a roundup of different cryptocurrency transactions and their tax implications under the Income Tax Act:
Profits and gains from business and profession
These transactions include receipt of cryptocurrency as consideration for sale of goods or supply of services, and sale and purchase of cryptocurrency as stock in trade. Such transactions are liable for taxation under the Income Tax Act. Under Section 2(13) of the Income Tax Act, the definition of business is inclusive, comprising of “trade, commerce or manufacture or any adventure or concern of such nature.” Any continuous activity like trade in cryptocurrencies is included within this definition, and profits realized are taxable thereunder, chargeable under Section 28 of the Income Tax Act.
Income from other sources
These incomes include mining of cryptocurrency, dealing in cryptocurrency solely for the purpose of investment, and receipt of cryptocurrency in the form of gifts. These transactions are taxable under the Income Tax Act.
- Generation of cryptocurrency through mining: Since the digital currency generated will be treated self-generated assets, there is uncertainty as to how they will be taxed and whether the provisions of capital gains will apply, or if it will be categorized under the head of ‘income from other sources’. Experts believe that currency generated through mining will indeed be considered under the head of income from other sources. It is to be noted that Section 55 of the Income Tax Act, which deals with the cost of acquisition and improvement, does not recognize mining.
- Receiving Crypto currency in the form of gift: Gifts received are taxed under the head income from other sources, and are taxed at individual slab-rates. Consequently, cryptocurrency received as gift will be taxed under income from other sources at concerned slab-rate and cryptocurrency received as gift worth INR 50,000 (US$671.07) and above shall be entirely taxable.
Also, the exemptions from tax on gifts received may apply on cryptocurrency as well. Some of the exemptions from tax liability on gifts are gifts received:
- From relatives
- On the occasion of marriage
- Under a will or by way of inheritance
Salary and income from house property
Since the cryptocurrency is not recognized as legal tender by the government, employers cannot make salary payments using this digital currency. Similarly, payment of rent using this currency is not legal and hence not recognized. Therefore, it will not have any tax liability in India under the present law, unless specific guidelines for the same are announced.
Section 2(14) of the Income Tax Act defines a capital asset as ‘property of any kind held by the assessee whether or not connected with his business or profession’. Thus, capital assets include all kinds of property except those expressly excluded under the Act. Therefore, any gains arising out of the transfer of cryptocurrency must be considered as capital gains, if they are held for investment. Depending on the duration for which these crypto assets are held for the purpose of investment, they would be subject to taxation under long-term capital gains (20 percent post indexation) or short-term capital gains (taxed as per individual slab rate).
Taxation under the Central Goods and Services Tax Act
Any business activity pertaining to cryptocurrencies or crypto assets, unless specifically exempted, is taxable under the CGST Act.
Indian crypto exchanges already charge GST from their users. This indirect tax is included in the trading fee that exchanges add to the buying price of Bitcoin, Ethereum, Tether, etc. Furthermore, the exchanges pay GST to the government as part of their general tax payments.
Recently, the Central Economic Intelligence Bureau (CEIB) has raised a proposal to the Central Board for Indirect Taxes and Customs (CBIC) to bring cryptocurrency exchanges and platforms under the GST purview. It has suggested that cryptocurrency mining be treated as a supply of service as it generates cryptocurrency and charges transaction fees, and as such, should classify as an intangible asset and attract a GST of 18 percent. The CEIB has also proposed that the taxpayers operating as cryptocurrency miners will be required to register under GST if their annual revenue exceeds INR 2 million. GST will be liable on the transaction fee and/or the reward, which is the currency mined.
Recent reports also suggest that foreign crypto exchanges in India might have to pay GST at 18 percent on cryptocurrency transactions in India. An equalization levy at two percent might also be imposed on them. To include these overseas crypto exchanges under the Indian tax umbrella, the Indian government could categorize overseas crypto exchanges with Indian users as Online Information Database Access and Retrieval (OIDAR) services.
What is the government stance on the legality of cryptocurrency in India?
On November 23, 2021, Lok Sabha, the common house of the Indian Parliament, announced a bulletin regarding conduct of business during the winter session. Among the 26 new bills tabled, a bill to ban all private cryptocurrencies in India has also been proposed to be introduced, which is currently being finalized for the consideration of the Union Cabinet.
The bill titled “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021”, intends to “create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”
While the bulletin remains silent on the details of the bill and fails to clarify what private cryptocurrency refers to, it also leaves several questions unanswered about the future of existing crypto investments in India. Amid this ambiguity, crypto investors in India, with total crypto holdings of around INR 400 billion (US$5.39 billion), find themselves in a state of uncertainty.
It is to be noted that while RBI governor Shaktikanta Das has called for a total ban of cryptocurrency in India, warning that its usage might destabilize financial systems, PM Narendra Modi has displayed a rather optimistic approach, ruling out total ban in his recent addresses, be it at the Sydney Dialogue held on November 18, 2021 or a high-level meeting on future of cryptocurrency, held on November 13, 2021. However, Modi warned against the use of cryptocurrency in money laundering, terror financing and drug trafficking.
The RBI has been proactively working towards the launch of Central Bank Digital Currency (CBDC) and is expected to launch the pilot CBDC in the first quarter of FY2022-23.
What are the speculations about the upcoming Cryptocurrency Bill ?
At present, there is no uniform definition for crypto assets in India, creating risks for users, investors, and authorities. The lack of uniform definition has posed regulatory challenges for taxation, financial security, monitoring, etc., and these have been repeatedly flagged by the Reserve Bank of India (RBI).
The new bill is expected to define cryptocurrencies in India and will probably compartmentalize the respective, and currently unregulated digital currencies, based on their usage. It is pertinent to note that only government-approved cryptocurrencies will be allowed to be traded in India once the bill comes into effect. Reportedly, the compartmentalization of these cryptocurrencies will be done on the basis of the technology employed and ‘as per use case’. In other words, the government will categorize cryptocurrency assets based on their end-use.
Furthermore, it is speculated that the Bill will merely regulate the recognized cryptocurrencies for the purpose of taxation and monitoring, while classifying them as “assets” for all purposes. Thus, the scope of the bill will probably not be purview to recognizing cryptocurrency as a medium of payments and settlement.