Cryptocurrencies aren't new; Bitcoin has been around for over a decade. But their popularity is. Leading to a rise in investing or trading of cryptocurrencies across the world, including India. And while it's not clear what regulation the impending law will impose, if you have transacted in cryptocurrencies then you will be liable to pay tax. The question is which one.
As of today, there is no distinct provision in India's income tax law for taxation of cryptocurrencies. Nor has the tax department issued any formal guidance. Tax experts, though, have taken one of two views.
That cryptocurrencies are a capital asset and hence, any gain is subject to capital gains tax. Or, that, depending on the circumstances, income earned from the sale of cryptocurrencies may also be classified as business income or as income from other sources and taxed accordingly.
Experts BloombergQuint spoke with said most individuals would’ve reported profits on crypto trades as capital gains. They also said that the Revenue Department, so far, hasn't advocated an alternate tax treatment. But popularity, and hence trade volume, of cryptocurrencies have picked up only in the last couple of years, for which tax assessments are yet to happen.
When they do, the department may ask probing questions.
Why ‘Capital Gains’?
The term "capital asset" has been defined widely in the Income Tax Act, 1961, to include "property" of any kind held by a taxpayer, with certain exceptions, Keyur Shah, partner and tax financial services leader at EY India, told BloombergQuint.
While the term "property" isn't defined in the act, there have been a plethora of judicial precedents wherein its meaning has been given a wide interpretation for tax purposes. Based on that, Shah determined cryptocurrencies should likely be considered as "capital assets" for tax purposes.
Anyone who has made gains by investing in cryptocurrency in the last couple of years, would have disclosed it as gains from capital assets—either short term or long term, L Badri Narayanan, executive partner at Lakshmikumaran and Sridharan Attorneys, pointed out.
The rate depends on the period for which the asset is held.
Short-Term Capital Asset
Holding period: 36 months or less [less than 12 months for listed equity]
Tax rate: Income tax rate applicable as per income slab [15% for equity/equity mutual funds]
Long-Term Capital Asset
Holding period: Over 36 months [12 months or more for listed equity]
Tax rate: 20% [10% for listed equity/equity MF]
Unless specified otherwise, cryptocurrencies will have to be held for more than 36 months to be classified as long-term capital asset, Shah said.
And once crypto is recognised as a capital asset, then every rule that applies to capital gains/loss would apply to it with equal force, independent tax practitioner Ameet Patel, pointed out.
That means indexation is permitted and if a taxpayer incurs a loss in equity assets or real estate, it can be set off against crypto gains, Patel explained.
It Could Also Be 'Business Income'
In certain cases, income arising from sale of cryptocurrencies can be classified as business income, Badri said.
When income is generated through regular trading in cryptocurrencies, the profit/loss can be considered as "business income".
For instance, Badri explained, if there is a miner who is in the business of generating and selling cryptocurrency, for him, it's a profit/gain from a profession, which is a business income. Viewing crypto gains as business income could be applied to exchanges as well. Provided it is in the business of buying and selling cryptocurrency on a regular basis, like stock in trade, Badri added.
Investors are likely to report crypto profits as capital gains but the government may be inclined to tax it as a business income. Once it gets categorised so, the investor will have to pay the rate depending upon the prescribed tax slab.L Badri Narayanan, Executive Partner, Lakshmikumaran and Sridharan Attorneys
Additionally, there is no indexation benefit on business income, which is applicable on capital gains, he said.
The 'Speculative Transaction' Angle
Under Section 43(5) of the Income Tax Act, a speculative transaction is one where purchase or sale of a commodity, including stocks and shares, is settled otherwise than by actual delivery or transfer of the commodity.
For instance, in the case of intra-day trading in shares, there is no delivery. The income generated from such a transaction is called speculative income.
In terms of tax treatment, for business income or profit derived from such a transaction, the set off rules differ, Badri explained. Speculative losses can be set off only against speculative gains, he said.
But when a transaction is not speculative, losses can be set off against other sources of income. So business loss can be set off against cryptocurrency gains but in the same financial year.L Badri Narayanan, Executive Partner, Lakshmikumaran and Sridharan Attorneys
"For instance, taxpayer X incurs a huge loss in his business this year. He has also made a significant amount of profit the same year from cryptocurrency. If X is able to show crypto trades as non-speculative, gains can be set off against business loss," Badri pointed out.
To establish that crypto transactions are non-speculative, taxpayers may want to argue that it involves actual delivery, Shah explained.
Where a transaction involves transfer of cryptocurrencies, it may be considered as actual delivery. This can be compared to actual delivery of shares (which comes under the category of non-speculative income). So, it should not be considered as ‘speculative business’.Keyur Shah, Partner and Tax Financial Services Leader, EY India
To reiterate, so far, this question has not been raised by the tax department. But it's important to remember that most of the tax assessments happen two years later, he said.
"So, in two years, this may become a big issue."
What About GST?
The goods and services tax law is silent on the taxability of crypto transactions. Equity trades are subject to securities transaction tax, while commodity trades attract commodity transaction tax.
That raises the question whether an ingenious reading of the GST provisions in the future can bring crypto trades under the indirect tax regime.
It is likely that cryptocurrencies will fall within the ambit of the term "goods". But as of today, there is no distinct mention of cryptocurrencies under GST laws, Shah said.
Taxability of cryptocurrency gains under the GST law is a grey area, Badri said.
"For an item to be taxable under the GST, it should fall under one of the schedules. It does not."
Pre-empting that this question might be raised by the GST department, Badri explained that cryptocurrency cannot be classified as software. The definition of software requires, without human intervention, change in a computer or a data processing machine.
Cryptocurrency doesn't make any system change the way processes, programs or algorithms do. It's just an intangible asset or an asset with a code.L Badri Narayanan, Executive Partner, Lakshmikumaran and Sridharan Attorneys
On a specific query on applicability of GST, Nischal Shetty, founder of WazirX, told BloombergQuint that no specific direction is needed from the government to pay indirect tax.
As an exchange, we diligently pay GST on the trading fees collected from our customers. However, there has been no official confirmation or intimation from the government around GST on crypto exchanges. This is where regulatory clarity will help the industry immensely.Nischal Shetty, Founder, WazirX
Shah also expressed that new bill on cryptocurrencies and its regulation, which is being tabled before the Parliament, is expected to provide some clarity on the tax aspects of cryptocurrencies.
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