Demystifying Cryptocurrencies: Taxation, Income Calculation and Payment of GST

Demystifying Cryptocurrencies Taxation Income Calculation and Payment of GSTAdd heading

Just about two years ago, banks, fintech companies, software biggies and governments across the world tried and tested cryptocurrency projects, giving a jumpstart to crypto revolution that involved trading and investments on Bitcoins. In India, trading on multiple cryptocurrencies has become as popular as investing in other capital assets to create a cashless economy.
Conversely, this has driven the tax authorities in India to roll out a strict, new tax law to regulate the earnings from the sale of crypto-assets that are classified as digital currencies, alternative currencies and virtual currencies.

Bitcoins and other cryptocurrencies are no-doubt viewed as hot, virtual assets. Though it is still unclear whether the RBI would treat it as ‘currency’, the crypto-assets will be subject to the regulations as per the Foreign Exchange Management (FEMA) Act, 1999. However, the catch is cryptocurrencies do not qualify as physical instruments such as currency notes, cheques, drafts, letters of credits, bills of exchange and promissory notes.

So what exactly is a Bitcoin? To understand thoroughly, below are some trivia and basics about cryptocurrencies.

The History of Bitcoin

Behind the currently emerging decentralized, digital cash system created by Satoshi Nakamoto, the inventor of Bitcoin, was a series of failed attempts to create a phenomenal digital payment system. The idea was to foster a virtual monetary payment system that was not controlled by a chain of central authorities like banks and the government.

Satoshi’s Bitcoin worked under the principle of allowing a chain of peer networks to hold complete record of transactions, account balance and history or unalterable database called blockchain which is secured by encryption techniques known as cryptography.

Each entity across the peer network are called ‘miners’ who validate or keep consensus of the financial records without the approval from the payment networks or even needing a central served owned by a bank. Once a miner verifies a transaction that can alter the ledger balance, records or contract, the new data or block gets added to the existing blockchain.

Transactional Nature of Cryptocurrencies

Highly Secure: Cryptocurrency funds are strongly secured by math-based coding called cryptography to ensure the confidentiality, integrity and avoid corruption of financial data.

Anyone can Use Cryptocurrency: Unlike trading on other securities, anyone can purchase, receive or send cryptocurrencies without needing any permission from monetary institutions, governments and banks.

Cryptocurrency Transactions are Irreversible: Once a fund gets transferred or money gets added into the ledger accounts and is approved by a miner, it is not possible to reverse the transaction.

Allows Fast and Anytime, Anywhere Transaction: Since the data about a transaction gets broadcasted across a network, it gets confirmed and validated in a matter of minutes, enabling anytime, anywhere transaction.

Tax Liability is based on the Country where the Operating Sever is Located: Bitcoins are not physical assets with an intrinsic value attached. Hence, the tax laws of the country where the Bitcoins’ operating server is located will be applicable in the computation of income tax.

Owing to the simplicity and decentralized control, cryptocurrencies like Bitcoin, Ethereum, Ripple and Monreo gained traction with very high trade volumes across exchanges like Okcoin, poloniex and shapeshift.

Besides being traded in exchanges in India such as Unicorn, Bitxoxo, Zebpay and Coinbase, the Bitcoins can also be stored digitally in online wallets.

How are Gains from Cryptocurrencies Taxable in India?

In countries like the U.S., Canada, U.K and Australia, the capital gains on crypto assets are subject to payment of tax up to 25 percent. Whereas in Germany, cryptocurrencies held longer than a year will be treated like tax-less equity funds. Most nations practice the system of levying income tax on earnings from Bitcoins and other crypto securities.

Bitcoins in India are considered capital assets and will come under the Section 2 (14) of the Income Tax Act, 1961, wherein all property or assets owned by an individual regardless of whether it is connected to his business or profession will be deemed as ‘capital assets’. Therefore, all gains and earnings from the investments on cryptocurrencies will be taxable as capital gains.

Calculation of Capital Gain Tax on Bitcoins

Incomes from the holding or transfer of Bitcoins will be treated as short-term or long-term capital gain, depending upon the holding period. In case an individual holds the Bitcoins for more than 36 months, it will be treated as long-term capital asset and tax rate of 20 percent after indexation becomes applicable.
If the holding period is less than 36 months, the crypto asset will be treated as short-term capital gain and subject to rate based on the tax slab.

Income Computation and Tax Calculation from Mining

The profits out of the earnings from the mining or process of confirming transaction on a cryptocurrency network are taxable as ‘business profits’. But the digital currency earned from the trading on Bitcoin will not be taxed.
In the case of Bitcoins that are born out of the mining process, it becomes self-generated assets whose acquisition value cannot be computed and hence the capital gain tax cannot be levied on such assets. Also, the capital gains taxes will be applicable by the transfer of Bitcoins that are created out of mining efforts.

Treatment of Gains from NRI Transactions

It is known fact that any income arising from the trading of an intangible asset or its transfer outside India by an NRI is will be not taxed. Trading of a Bitcoin which is an intangible asset, in an Indian exchange by a person domiciled outside the country will not be liable for income tax in India.

GST Applicability on Cryptocurrency Transactions

All EU member nations treat Bitcoins and other popular cryptocurrencies as foreign currencies and in countries including the U.K., Switzerland and Germany, all crypto-asset transactions are VAT-free. Unlike Australia and other countries where cryptocurrencies are exempted from GST, India seems to have its own approach.

If the Bitcoin is traded as currency in India, it becomes as physical asset like money wherein, the central goods and services tax or CGST will be levied. However, GST will not be applicable.
If the Bitcoins or cryptocurrencies are exchanged for Indian rupees, GST will be charged on the financial services fee. When the service provider charges a commission on the services rendered, a GST rate of 18 percent will become applicable. But, when the service provider charges no fee, the supplier of the currency will have to pay about 18 percent GST on one percent of gross amount of the rupees paid by the receiver.

Taxation of Income from Mining

In the mining process, the miners are rewarded Bitcoins in exchange for their services of securing network with new transaction data. Therefore, they are required to pay about 18 percent GST on the fair market value of the Bitcoin.

Payment of Income Tax on Gains from Cryptocurrency

In India, the cryptocurrency exchanges recommend traders to first adhere with it’s know your customer or KYC process before transacting on Bitcoins and other crypto-assets. The investors are supposed to link their bank account, permanent account number (PAN) and Aadhaar number for the IT department to run checks and scrutinize transactions.

Now, with the confusion brewing around the treatment of Bitcoins as capital assets or currencies that is yet to be addressed by the RBI, there seems to be not much information for the common investor about the tax policies that are applicable.

Cryptocurrencies and Bitcoin are treated as digital gold with a global scope that also carries the threat of funding black market and illegal economic activities. Its extreme volatility alongside the rapid growth potential holds a promise of lavishly benefiting the tech-savvy investors or failing their investment dreams.

In India, the cryptocurrency has disrupted the finance market, bringing it closer to the large scale digital initiatives. To facilitate your filing of IT returns on investments on Bitcoins and other cryptocurrencies, it is best advised to seek support from individual tax experts or agencies such as Munimji.

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