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TAXABILITY OF VIRTUAL DIGITAL ASSETS IN INDIA AND OTHER COUNTRIES

INTRODUCTION

The emanating digital asset class is covered by the names like Ethereum, Bitcoins, Tokens, and many other specifications, yet no conclusive definition has been assigned to the virtual digital assets (VDA). All digital assets associated with financial transactions are dragged under the umbrella term of digital currency. The first cryptocurrency which is a digital asset was Bitcoin, which appeared in 2008. Moreover another element of virtual asset, tokens, in a decentralized system, no central bank or administrator is responsible for the dealings and accruals in the token. The financial infrastructure of the countries in light of recent market capitalizations exceeding USD 2 trillion thus expanding the scope of VDA.[1] Cryptocurrencies are gaining popularity, with the value of bitcoin rising above $50,000 in August and the value of other coins such as Ethereum and Dogecoin also climbing. The demand for technology-driven innovations in virtual assets has increased with the expansion of investment. By using blockchain, participants can agree on the condition of a database without having to depend on an intermediary, such as a bank, to facilitate money transactions. Increasing efficiency, reducing costs, and preventing fraud are all potential benefits once a digital ledger of transactions is established since it would be difficult to tamper and thus the inclination towards digital assets is flourishing now more than ever in the past.[2]

VIRTUAL DIGITAL ASSETS  – THE CONCEPT

Unlike traditional data storage methods, blockchain is a decentralized method in which no single individual or organization is in the way of all the data. Blockchain is formed by linking fresh packets of data (called blocks) with the most recently contributed block, creating a chronological chain of data blocks. Cryptocurrencies and non-fungible tokens(NFT) are both enabled by blockchain or distributed ledger technology which are inclusive of the Concept of Virtual Digital Assets.[3] Cryptographically generated information, codes, numbers, or tokens, as well as any other digital asset, have been classified as VDA. Such assets can be electronically transferred, saved, or traded. A digital asset also includes non-fungible tokens, or any token of a similar nature, by whatever name it is called. A digital asset based on blockchain, NFT allows anyone to check its authenticity and ownership. Digital art, photos, movies, texts, music, and even virtual real estate and in-game merchandise can be purchased and sold using NFTs.[4] Despite a government bill intended to criminalize cryptocurrency investment and trading being considered since 2019, the Finance Bill introduced a capital gains tax on the sale, exchange, or gift of virtual assets. New provisions have been included in the Union Budget for 2022-23 regarding taxes on and tracking of  VDA. The Finance Bill defines VDA under the newly-inserted provision (47A) under Section 2 of the Income Tax Act of 1961.

TAXATION OF VDA IN INDIA

Any income derived from the transfer of VDA will be taxed flat at 30% effective from Financial Year 2022-23. The provision takes effect on April 1, 2022. As a result of the tax return, other agencies could question the recipient about the source of the gift as the capture of information on crypto-assets gifted. This would allow the income tax department to collect tax on the gift.[5] When given as a gift, the asset is taxable as income in the recipient’s hands under the heading Income from other sources at the rate of 30%. The government recommends that beginning July 1, 2022, the government will deduct a one-percentage-point tax from payments made for the transfer of virtual digital assets to residents. The tax laws apply to withholding tax even if part of or all of the consideration is in kind. The possibility of carrying over past losses and setting them off against future revenue has been denied.[6]Capital gains generated from the transfer of VDA are classified as short- or long-term gains depending on the period over which they were held. In the event that a virtual asset is retained longer than 36 months following its purchase, it is regarded as a long-term capital asset; otherwise, it is regarded as a short-term capital asset. In addition, other than the cost of acquisition, there would be no deductions allowed to calculate the gains on such assets.

TAXATION OF VDA IN OTHER COUNTRIES

USA

Virtual currencies, such as those used for payments for goods or services, or as investments, may have tax implications in the USA, where they are digital representations of value that function as a medium of exchange, a unit of account, and/or a store of value. Because crypto is regarded as property by the Internal Revenue Service (IRS), rather than currency, it is taxable in the United States. The tax rate ranges from 0% to 37%.[7]

UK

Cryptocurrency units are referred to as tokens by HM Revenue and Customs (HMRC). Tokens can be disposed of in several ways: by selling them for money, by trading them for another kind of token, by paying with tokens, and by donating them to someone else (unless it’s a present for a spouse or civil partner). For those who are higher or additional rate taxpayers, capital gains taxes for selling cryptocurrencies are 20%, and for those who are basic rate taxpayers, they are 10% (though the rate varies based on other factors, like your overall taxable income and size of gain, as well as any deductions). A capital gains taxpayer is entitled to a tax-free allowance of £12,300.[8]

Australia

For capital gains tax (CGT) purposes, revenue is usually treated as disposing of bitcoin when you exchange it for products, cash, or other cryptocurrencies, and you may have to report a capital gain or loss on your taxes. To calculate the revenue from cryptocurrency dealings, convert the value into Australian dollars. Capital gains and losses are determined by comparing the cost base with the capital proceeds. Tax deductions of 50% are available for crypto that has been held for more than a year. A capital gains tax (CGT) must be paid on the sale of bitcoin (trading, exchanging, selling, gifting, using to purchase goods and services).[9]

Canada

Cryptocurrency profits could be considered a business income or a capital gain. A person must determine the type of income they are received before they can properly report it. The earnings on a cryptocurrency settlement are usually not considered capital gains if the taxpayer is selling cryptocurrencies inclusive of the business. If the taxpayer sells a cryptocurrency but does not keep it for business purposes, and its selling price exceeds its purchase price or adjusted cost basis, he or she has made a capital gain. Capital gains taxes are determined by the inclusion rate (IR), which is composed of taxable capital gains and allowed capital losses. Over the years, the internal rate of return (IRR)  has fluctuated but currently accounts for 50% of the overall IRR (taxable capital gains minus allowable capital losses), essentially implying capital gains would be taxable at 50%.[10]

CONCLUSION

VDAs have seen an increase in activities like sales and purchases. It had been necessary to establish a specific tax structure for these transactions due to their size and frequency. Since this industry often produces new products as a result of technological advancements, the Government of India has ensured that this definition is flexible enough to accept any new product. Although the Indian government remains sceptical about the potential applications of blockchain technology, the Finance Bill calls for the creation of a central bank controlled currency, which will serve as the digital counterpart of the Indian rupee. The question of whether taxes should be paid on illegitimate revenue may arise with this effort to tax cryptocurrency. If a business earns profits lawfully or illegally, the government has the right to tax them.[11] The case ofCIT v SC Kothari (69 ITR 1) addressed the question of taxability of revenue earned from illegal enterprises before the Gujarat High Court. The division bench found that illegal activity or wrongdoing cannot affect taxability.[12] VDA regulations and rules must be accompanied by precise, accurate, abundant, and prevalent information about their cost/profitability and the transparency that VDAs, however, are unregulated thus inculcating no protection. Consequently, there is a certain amount of perils involved, as there is no law guaranteeing the security of the invested funds in addition to the online transactions that pose an escalated risk of hacking, password theft, and identity distortion.

Author(s) Name: Aathira Pillai (University of Mumbai)

References:

[1] Ibm.com., Making Sense of Digital Assets <https://www.ibm.com/downloads/cas/WZWMOZDV> accessed 12 March 2022.

[2] South China Morning Post, Why are more than 75 million people around the world using digital wallets? <https://www.scmp.com/native/business/topics/new-money-virtual-assets/article/3152735/how-virtual-assets-will-lead> accessed 12 March 2022.

[3] Mondaq.com., Virtual Digital Assets In India: A Sneak Peek Into India’s Regulatory Framework – Technology – India <https://www.mondaq.com/india/fin-tech/1164634/virtual-digital-assets-in-india-a-sneak-peek-into-india39s-regulatory-framework> accessed 12 March 2022.

[4] Vanamali, K., What are virtual digital assets?, Business-standard.com., <https://www.business-standard.com/podcast/technology/what-are-virtual-digital-assets-122020800065_1.html> accessed 12 March 2022.

[5] Sikarwar, D., Virtual digital assets may get a broader definition, The Economic Times <https://economictimes.indiatimes.com/tech/tech-bytes/virtual-digital-assets-may-get-a-broader-definition/articleshow/89393614.cms?from=mdr> accessed 13 March 2022.

[6] WION., How will tax on virtual digital assets impact Crypto investors in India? CoinSwitch CEO answers. <https://www.wionews.com/india-news/how-will-tax-on-virtual-digital-assets-impact-crypto-investors-in-india-coinswitch-ceo-answers-451545> accessed 13 March 2022.

[7] Irs.gov., Virtual Currencies | Internal Revenue Service <https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies> accessed 13 March 2022.

[8] GOV.UK., Check if you need to pay tax when you receive cryptoassets <https://www.gov.uk/guidance/check-if-you-need-to-pay-tax-when-you-receive-cryptoassets> accessed 15 March 2022.

[9] Ato.gov.au., Cryptocurrency and tax <https://www.ato.gov.au/General/Other-languages/In-detail/Information-in-other-languages/Cryptocurrency-and-tax/> accessed 15 March 2022.

[10] Canada Crypto Tax Guide 2022.<https://www.coindesk.com/learn/canada-crypto-tax-guide-2022/> accessed 15 March 2022.

[11] NDTV.com., Cryptocurrencies Not Legal In Country Right Now, Says Minister <https://www.ndtv.com/business/cryptocurrencies-not-legal-in-country-right-now-says-minister-2765900#:~:text=The%20Reserve%20Bank%20of%20India,finance%2C%20told%20reporters%20in%20Indore.> accessed 15 March 2022.

[12] The Financial Express, Income from unlawful sources <https://www.financialexpress.com/archive/income-from-unlawful-sources/453777/> accessed 15 March 2022.