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Taxing of Crypto-gains: A new domain of Regulations

Introduction

The term ‘crypto-currency’ is defined as a decentralized asset that is in digital form and can be used as a medium of exchange based on Blockchain Technology. To put it in simpler words, crypto-currencies are digitally based currencies that are used in a similar way to the other existing currencies, for various purposes. However, crypto-currencies have a decentralized nature, owing to which it has been involved in controversial debate since the beginning. Crypto-currencies having a decentralized nature particularly reflects that it is used as a medium of exchange without the involvement of banks, financial institutions, or other central authorities. This particular aspect concerning crypto-currency arises the controversy that exists around its existence, therefore, it is pertinent to discuss the legality of crypto-currency.

Status of legal recognition of crypto-currencies

There is no legal status of identity or recognition which has been granted to crypto-currencies till the present date. However, in the recent past, when there were a plethora of debates going around crypto-assets due to their ambiguous nature, the Reserve Bank of India issued a Circular in April 2018, not specifically banning the use of crypto-currencies, but explicitly providing that, if any intermediary or exchanges facilitated the use of crypto-currencies, then strict action would be taken against such intermediary. Nevertheless, the Supreme Court provided temporary relief to the crypto assets holders by quashing the Circular released by RBI. The Supreme Court in the case of Internet and Mobile Association of India v. RBI pronounced that even though the RBI has sufficient powers and jurisdiction over matters relating to Virtual Assets, “…the prohibition imposed through the April 2018 Circular is disproportionate, and, therefore, ultra vires the Constitution.” In the absence of any legislative prohibitions, the Court reiterates that mere dealing in the currencies cannot be banned and should be recognized as legal commerce which is protected by Article 19(1)(g) of the Indian Constitution, which provides for basic freedom to every individual to carry on any vocation, trade, or business. According to the Court, “the RBI’s circular in imposing a wholesale moratorium on the provision of banking services to these dealers, unreasonably impinged on what is otherwise a valid vocation, by going beyond the limitations permitted under Article 19(6).” Therefore, it was established that the Circular passed by RBI would be ineffective, and the usages and dealings of crypto-currency would be valid, but it would not have any banking or financial intermediaries involved in this process.

Tax implications of Virtual Digital Assets: Insight into Budget 2022

Furthermore, the Income Tax Department had not provided any clarifications concerning the tax implications on the profits earned by utilizing cryptocurrencies. In the Budget 2022, the Government has officially recognized the term digital assets inclusive of crypto assets and termed it as “Virtual Digital Assets” consisting of all kinds of crypto instruments. The Tax implications which are due to be imposed on such crypto-gains w.e.f 1st April 2022, are:

  • Income earned from transfer or purchase or sale of Digital Assets like crypto-currencies is to be taxed at 30%. This necessarily implies that all gains or crypto-gains specifically, will have a tax imposition of a flat 30% on the amount of profit earned through undertaking this transaction.
  • Deductions concerning crypto-gains or transactions involving crypto-currencies will not be allowed except for the cost of acquisition of digital assets.
  • Loss incurred on the sale of any crypto assets will not be allowed to be set off against any other income. Therefore, it was made clear that no set-offs or deductions will be available in the hands of the crypto-holders.
  • Another important aspect is that TDS at the rate of 1% will be levied on transactions and income which cross the threshold limit, which in this case is Rs. 10,000 in a year.
  • Crypto-assets can be widely used as a means for gifting purposes. However, gifting of digital assets cannot be a tax-saving escape, and therefore, gifting of crypto-assets will be taxed at the hands of the receiver.

To impose tax implications on crypto-assets, tax experts need to contemplate whether crypto would come under the purview of ‘currency’ or ‘asset’. It is important to scrutinize here that as per the Circular issued by RBI, and even to the present date, despite the circular being quashed, Crypto-currencies have not been given legal recognition and it has not been validated by RBI to able to classify them as a legal tender. Hence, it is safer to classify it as ‘assets’ instead of currencies at the present instance. According to the Standard Income Tax Rules, the gains earned through the crypto transactions would be taxable under the Heads of Business income or Capital gains. Further to this, it has been clarified that if there are voluminous trades of crypto-assets, then the profits earned thereto would become taxable under the head ‘business income.’ Crypto assets will be taxed under the head of ‘capital gains’ if these assets have been purchased as a long-term investment and are looking forward to a higher appreciation of value.

Proposal to introduce GST liability on Crypto-currencies

The Central Economic Intelligence Bureau (CEIB) has recently proposed to categorize and impose GST liabilities on the transactions involving crypto-currencies as a supply of goods or services. Since the discussion in this regard is at a very nascent stage, and the government is still contemplating various other factors which are likely to arise, it may so happen that the transactions fall under the GST Implication under the 18% GST tax rate slab.

Conclusion

To conclude, the Government is dealing with Virtual Digital Assets and the same is in a very early stage. However, the taxability of these assets is one such aspect that cannot be escaped. An individual dealing with crypto-assets and earnings profits has to pay tax from the gains arising out of it. This particular aspect was provided with a clearer picture with the help of the 2022-23 Budget, and therefore the implication of GST Tax liability can also be considered an upcoming event in this sector. The Ministry of Corporate Affairs also, in this regard, has made it essential to report virtual currency earnings and losses. The Company has to mandatorily provide for all disclosures. In addition to that, the value of crypto-currencies on the balance sheet date must be disclosed. Hence, w.e.f. 1st April 2021, revisions to Schedule III of the Companies Act have been made. This mandate can be viewed as the government’s first step toward regulating crypto-currency.

Author(s) Name: Mansi Bajaj (Symbiosis Law School, Hyderabad)