So far, we haven’t shared an article based on taxation in cryptocurrency, hence today I decided to share some frequently asked questions related to taxes in cryptocurrency. Since we don’t have any clarity as of now regarding the taxes on capital gains (short term & long term) on cryptocurrencies, this article should not be considered as financial advice. I’ve just shared my own experience related to taxation and filing returns on crypto gains & I’m not any professional CA.
There are almost 10 million users of cryptocurrency holders in India as per the economic times’ report and while the policymakers are still figuring out how to frame regulations around the industry, people are confused. Among this 10 million userbase, most of them aren’t day traders and they hold the crypto assets inside their wallets as a long-term investment.
Undoubtedly Crypto is a wild ride. The market corrections back in May 2021 and a bullish BTC now have clearly shown how returns vary widely in the short term. Apart from the returns, many tech-savvy users prefer keeping their funds on a decentralized wallet application like Metamask or Trustwallet. How taxes will be implied upon those funds is another big question among retail investors.
Blockchain & Taxation: Potential use case by IT department
Unless you’re planning to evade taxes which one clearly shouldn’t these things should be considered before filing returns. Blockchain in itself is a digital ledger of transactions and all of those valuable details can’t be tampered with by any single person. Once a block is filled with data of transactions, it is added to the chain in chronological order. The same can be used by the authorities to trace the funds back to a user in many forms.
Building a Smart Contract
These self-executory pieces of code are stored on the blockchain and run on a predetermined set of instructions. Regulatory bodies can program smart contracts in accordance with state taxation laws. These automated code blocks can be used to offer all the possible benefits to entities in form of tax avoidance and collect revenue based on the wallet holdings of a user. Exchanges can possibly report the data of deposits and withdrawals from these anonymous wallets & KYC norms can be used to accurately find the owner of a wallet.
Collecting and analysis through a third-party
Tax authorities can ask the participating members of the blockchain technology to collect relevant information from the general public and corporations through chain analysis. This would ensure the submission and analysis of authentic documents. In today’s era, most of the tax processing is done using a centralized database that monitors all of the transactions made by an individual throughout the year. Post filing the tax returns the metrics are compared and in case of a mismatch, the system reports the same for audit.
Perception of Crypto
Many people today view cryptocurrency as a good to have an investment in their portfolio to hedge against Fiat currencies. However, the Central Banks view it as a threat to financial stability for the countries. Both of these play a significant role for the policymakers in their taxation. Mr. Anurag Thakur said earlier this year that the gains from the transfer of cryptocurrencies are subject to tax under the head of income, depending on the holding nature of the same. Governments can’t tax Bitcoin directly but if someone exchanges fiat to bitcoin while buying or selling, that money could be taxed at a certain percentage.
Current Tax Laws
Taxation is in two forms: Direct and Indirect. The common example of Direct taxes is the Annual Income-tax Act, 1961. Individuals are bound to pay a certain percentage of their annual income in Rupees to the government based on their annual income bracket. Only 1.46 crore Indians out of 130 crores pay this kind of tax.
The other one is indirect taxes and every single citizen pays this in form of the Goods and Services Tax (CGST) Act, 2017. This is to be paid when anyone buys any form of commodity or product or pays for certain services.
The Income Tax Law
Broadly speaking there are five heads of income, namely Salary, House Property, Business, Capital Gains, and Other Sources. There isn’t something termed as ‘Crypto’ yet in the income tax laws. Since a majority of those 10 million investors look at Crypto as a means of investment, let us look at the Capital Gains aspect of the income tax law.
The Capital Gains section of the Income Tax act levies a tax on the profit or gain from the transfer or sale of a ‘capital asset’. The expenditure along with the sale would generally be in the nature of additional fees levied by the exchange.
Another thing that could be considered is the Indexation benefit only if the holding period was over 3 years (long-term). Apart from that, there’s a Short Term Capital gains tax which is applicable for people who sold their holdings before 3 years at a fixed rate based on their annual income.
What if someone didn’t buy crypto in the first place but decided to mine it? What could be the cost of acquisition in such a case since mining isn’t free either and it requires high investment in the hardware, electricity & maintenance costs. Since there isn’t any exact cost related to the mining of crypto, there may not be a Capital Gains tax.
This category might fit crypto miners. Since mining crypto profitably requires a significant investment, any gains/profit made from mining could be taxed as gains from Businesses or Profession and the calculation would be relatively straightforward. Treating crypto as an inventory and calculating the net profit according to the provisions of the law.
Even if we don’t view our crypto portfolio as a capital asset or business, any income derived from it could be filed as income from other sources. The tax for the same would be chargeable at the applicable income tax slab rates.
GST can be levied on all ‘supplies’ of ‘goods’, or ‘services’, or both. Thus crypto-related transactions can be very much brought under the GST regime as a supply of Goods or Services. Even if we look today, Mobikwik imposes a GST on the transaction fees which can add up significantly for bigger sums of money.
The definition of the term “goods” includes “every kind of movable property other than money & security” and the definition of “services” includes “anything other than goods, money & securities”. Thus, Crypto could be taxed at the residual rate of 18% under the services section however, a person is generally liable to pay GST if the annual turnover exceeds Rs 20 lakh which is way beyond an average consumer.
Even though we all want cryptocurrency to be regulated in India, the taxation clarity needs to be looked down upon soon. There is a lot of confusion related to taxes and many people don’t even report their crypto gains. Nobody should neglect them entirely but we must take our best assumption and file the returns accordingly as we feel unless there’s a law. Please remember that tax evasion isn’t cool.