Things Indian Taxpayers Should Know about Bitcoin Taxes

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Cryptocurrency exchanges have hailed the government’s planned taxation of digital assets as a significant step toward recognising cryptocurrencies as an emergent asset class. The tax-to-GDP ratio is a metric that compares a country’s tax revenue to its GDP. As a result, the government may cast a larger fiscal net if the tax-to-GDP ratio rises.

According to the Income Tax website, the overall number of taxpayers is estimated to be about 4.5 crores by December 2021. However, more than 40% of the population is still deemed impoverished. The majority are under 18, students, and senior persons, none of whom pay to the budget. As a result, a sizable percentage of the population is left out of the tax system.

The Tax on Digital Assets

This year, the government has sought input from leading tax advisors on whether revenue from cryptocurrency trading or investing can be regarded as business income rather than capital gains.

In the year 2009, Bitcoin became the first cryptocurrency. As a result, the number of cryptocurrencies that have been generated has soared, including Litecoin, Ethereum, Zcash, Dash, Ripple, and others. Given the government’s efforts to move towards a cashless economy, bitcoins have slowly acquired acceptance in India.

In practice, peer-to-peer bitcoin transactions are facilitated by blockchain technology, which functions as a public ledger for all transactions.

As we approach 2022, governments worldwide are calling for crypto regulation, yet India’s cryptocurrency economy has thrived in a legal quagmire for quite some time. The union government has expressed interest in introducing a cryptocurrency regulation or bill. Still, suppose recent reports are to be believed. In that case, there will be more delays ahead, as the upcoming budget session of Parliament, which begins on January 31, is unlikely to provide any immediate regulatory relief to investors or other industry stakeholders.

The bill has already been delayed because it was not discussed during the Parliament’s winter session, which ended on December 22 last year, despite Finance Minister Nirmala Sitharaman’s earlier statements that a “well-consulted” bill would be coming through and that it would be tabled in the Parliament once the cabinet approved it.

However, the bill didn’t show up in the recent parliamentary session; but it was announced that the government would be releasing a CBDC by 2023. Securities and Exchange Board of India (SEBI) with regulating cryptocurrency transactions, including trade, sale, and purchase of cryptocurrencies approved by the Centre.

“Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk. However, associated risks also need to be carefully evaluated against the potential benefits”.

Because the RBI backs CBDC, it will be free of the volatility of private cryptocurrencies. The Centre wanted extra time in Parliament to propose the Cryptocurrency Bill, skipping the Winter session.

The potential of a bitcoin tax can be considered in the following scenarios:

First, bitcoin mining

It should be noted that because bitcoin is a self-generated asset, the cost of acquisition cannot be established. Furthermore, it is not covered by Section 55 of the Income Tax Act of 1961, which determines the acquisition cost of some self-generated assets.

As a result of the Supreme Court’s judgement in the case of B.C.Srinivasa Shetty, the capital gains computation process collapses. As a result, there would be no capital gains tax on bitcoin mining.

This posture will be maintained until the government amending Section 55 of the Act. Bitcoins held as a long-term investment are exchanged for real money.

If bitcoins, which are capital assets, are held as an investment and then transferred in exchange for real cash, the increase in value will result in either a long or short term capital gain, depending on how long the bitcoin has been held.

Long-term profits would also be taxed at a 20% flat rate, but short-term gains would be taxed at the individual slab rate. Finally, after considering the benefit of indexation, the acquisition cost for long-term capital gains will be estimated.

For example, if a person’s taxable income reaches Rs 10 lakh, they will be subject to a tax rate of 30%, rather than the flat rate of 20% that they would be subject to if taxed on long-term capital gains. If taxed under income from other sources, the benefit of indexation that would be available if taxed under capital gains would not be available.

Bitcoins held as a stock-in-trade are being exchanged for actual money:

Therefore, the gains derived from bitcoin trading activity would be liable to taxation at the individual slab rates because they are derived from a business.

Bitcoins are being accepted as payment for products and services:

Bitcoins received in this manner will be regarded similarly as money. In the hands of the recipient, it would be considered income. Furthermore, because the recipient’s income was earned through a company or profession, he would ordinarily be taxed under the heading earnings or gains from a business or profession.

The government has contacted senior tax consultants to develop a framework that exclusively taxes crypto investment income or earnings; no other asset class will be affected.

As a result, this could be the government’s first attempt to solicit input on how such assets should be taxed, based on the laws stated in the cryptocurrency bill.

Cryptocurrency GST regulations:

  • Cryptocurrency trading should be categorised similarly to stock trading. This would clarify the categorisation of cryptocurrency trading and guarantee that GST is only applied to commissions.
  • Lending and staking are two of the most promising crypto activities, with the ability to generate a significant amount of wealth for India. Given that many investors will wish to own assets from this asset class, it will be prudent to build a structure around lending and staking for passive players to enable cash flows in the asset.

Assistance from income taxes:

  • Capital expenditures incurred by Crypto firms should be permitted to depreciate more quickly.
  • To help the crypto business, the 18% tax rate (which is solely applicable to manufacturing entities) should be extended to it as well.
  • Investors’ tax provisions should be clearly established and consistent with LTCG/STCG on stocks.

A solid legal framework is required:

  • In conjunction with the crypto ecosystem’s actors, construct a comprehensive crypto policy. Establishing a clear legal framework for bitcoin will increase investor confidence in the market, allowing the cryptocurrency sector to gain traction. 
  • The government might go to the World Economic Forum’s report on navigating cryptocurrency for guidance and support self-regulation within established parameters.
  • Crypto Exchange (as a new category) should be authorised to become a reporting entity under FIU to reduce the danger of money laundering and financial terrorism. 
  • Currently, the reporting format is designed specifically for banks, NBFCs, and other PSPs. The implementation of a new format standard from the perspective of Service Providers will make reporting suspicious transactions easier.
  • Create regulatory safe havens to encourage the crypto industry’s new ideas.

Cryptocurrency Sourcing:

  • Creating a clear framework for the use of cryptocurrency by enterprises. Authorise and licence cryptocurrency exchanges as a route for crypto imports under the Authorised Dealer category.
  • Implement the Travel Rule and establish rules for the transmission of information about the source and beneficiary of each crypto send and receive transaction between exchanges.
  • There are now roughly 7 protocols for information exchange throughout the world; India needs to determine the most efficient protocol and set standards for it in order to improve cooperation among Indian and international exchanges for transparent crypto money movement.

The ‘Crypto Tax’ has Arrived:

Finance Minister Nirmala Sitharaman announced a 30% tax on the earnings from the transfer of virtual digital assets in the Union Budget 2022-23 on Tuesday.

Cryptocurrencies and Non-Fungible Tokens are among the virtual digital assets subject to taxation (NFTs). In 2022-23, the government plans to launch a central bank digital currency, commonly known as CBDCs, supported by blockchain technology.

Things Indian Taxpayers Should Know About Bitcoin Taxes

What is a “virtual digital asset”?

  1. Any information, code, number, or token (not being Indian currency or foreign currency), produced through cryptographic means or otherwise, via whatever name called, providing a digital representation of value exchanged with or without consideration, with the guarantee or representation of having intrinsic worth, or functions as a store of value or a unit of account, including its use in any financial transaction or investment, but not limited to investment schemes
  2. A non-fungible token or any other token of a comparable sort, referred to by any name
  3. Any other digital asset specified by the Central Government in a notification published in the Official Gazette.

“Any income from virtual digital assets is taxable at 30%,” the finance minister said during the federal budget presentation. “Except for acquisition costs, there will be no deduction.” Moreover, the TDS applies after a certain monetary threshold has been reached, and the gift of virtual currencies is taxable in the recipient’s hands.

The gifts will be taxed in the recipient’s hands, she said, and payments for the transfer of digital assets will be subject to a 1% tax deducted at source (TDS). It was also announced that any other gain might not offset any loss incurred due to the exchange of such digital assets.

According to Nischal Shetty, Founder and CEO of Indian cryptocurrency exchange WazirX, the significant development today was clarity on crypto taxation. This would provide much-needed recognition to India’s crypto sector.

The profits earned from trading or investing in cryptocurrencies or other digital assets such as NFTs will be 30% tax. Furthermore, according to the notice, any losses incurred due to a virtual digital asset transfer cannot be offset against any other revenue. The government has also proposed levying TDS on payments made in connection with the transfer of virtual digital assets at a rate of 1% of such consideration above a certain monetary threshold.

Sumit Gupta, co-founder and CEO of CoinDCX, said in a statement that the taxation decision gives the industry “much-needed confidence” and that “taxation of virtual digital assets or crypto is a step in the right path.”

The 30% slab does not sit well with all players, who believe it is too high.

Experts feel that the 30% tax rate would add to the tax burden on cryptocurrency investors, who will have to pay a third of their profits in taxes. As per  Sharat Chandra, a crypto advocate, This decision will force people to return to traditional ways of investment like stocks and mutual funds, which are not subject to a 30% tax.

Given that this will govern NFTs, Keyur Patel, Co-Founder and Chairman of GuardianLink and BeyondLife.Club, an NFT platform, voiced dissatisfaction.

While understanding legislation to manage other aspects of crypto is essential, NFTs are nascent in their classes, and taxes will have to adapt to expand the evolving ecosystem, according to Keyur Patel.

TDS rates, according to experts, can make investing even more difficult for crypto traders.

The government has grouped virtual assets, putting bitcoin and NFTs under the same category. It will initially be a massive hurdle for the investor community, but like with other ecosystems, it will change. Worldwide NFTs are still classified as non-taxable assets, and the adjustment in understanding that crypto token is different from digital NFT must be considered for future amendments.

Crypto Tax
Crypto Tax

The Finance Minister Announces India will Soon have its Own Digital Currency

Experts feel that the introduction of CBDC will undoubtedly encourage institutional entities to enter the blockchain market. On 1st Feb, Finance Minister Nirmala Sitharaman stated that the Digital Rupee, a central bank digital currency (CBDC), will be launched in 2022-23.

The Reserve Bank of India will launch the CBDC in the coming fiscal year. This comes on the heels of the government’s intentions to build a CBDC underpinned by blockchain technology.

In July of last year, the RBI announced that it was developing its own digital money. RBI deputy governor T Rabi Sankar dubbed the Central Bank Digital Currency (CBDC), claiming that it will function similarly to a fiat currency and be fungible one-to-one.

The adoption of CBDC will improve and make it easier for people to use Polytrade with the supporting infra provided by the govt. The development will make digital currencies more accessible to the people, just as UPI made digital cash easier to use. We expect that shortly the government will continue to support and encourage digital currencies,” stated Piyush Gupta, CEO of Polytrade on Central Bank Digital Currency CBDC.

The advent of CBDC, according to CoinDXC’s Gupta, is a clear signal of India being a digital-first, efficiency-driven, and transparency-led system. CBDC with the backbone of Blockchain” will help India “gain a powerful position in the global economy,” he added.

Technology professionals and evangelists have presented several concepts for how the Digital Rupee could be transacted. Still, the Reserve Bank of India’s formal announcement will most likely clarify how citizens transact the Digital Rupee. One significant difference will be that a Digital Rupee transaction will be immediate, unlike current digital payment methods.

CBDC is not analogous to the private virtual currencies that have mushroomed during the last decade, according to the RBI deputy governor. Private virtual currencies are opposed to the traditional understanding of money.

The country initially looked into cryptocurrency regulation in 2017, when an inter-ministerial committee was formed to regulate virtual currencies. If India continues its intentions, it will be one of the world’s largest economies to implement a so-called central bank digital currency (CBDC).

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Aadrika Sharma
Aadrika Sharma

I enjoy writing and try to learn new things every passing day!

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