Decoding The Grey Area Of Taxing Crypto Assets And Gains In India

Unlike previous years, FY21 saw an exponential rise in the number of crypto traders and investments globally. In India, the number of crypto traders has grown from 5 Mn to 15 Mn in the last year alone. The rising numbers, as well as crypto-related frauds, have alarmed the regulatory bodies which include the Reserve Bank of India (RBI), income tax department (IT), Enforcement Directorate (ED) and others. With tax returns being the focus of most households and businesses right now, it has become imperative to understand the crypto taxation in India and clear the confusions surrounding the same.

While the RBI has already cautioned the banks pertaining to crypto transactions and massive conversion of INR into crypto, ED has been pursuing cases related to exchanges’ operations, their sources and so on. For instance, the central agency has already issued a show-cause notice Binance-owned WazirX for crypto transactions worth INR 2,790 Cr. The Narcotics Control Bureau and state police machineries have been arresting people associated with illegal purchases in crypto such as LCDs on the Dark Web.

However, given the fact that there is not much clarity on tax applicability on crypto earnings and transactions, Inc42, spoke to experts to understand and bring clarity on the same.

“The construct of taxation on crypto assets is still a grey area. Declaring and paying taxes on any form of gains or income from or by way of crypto is however advisable. In general, mined crypto assets would attract income tax and those purchased through trading and crypto transactions on exchanges would be amenable to capital gains taxation,” – N. S. Nappinai, advocate, Supreme Court of India and founder of Cyber Saathi.

Is Crypto A Foreign Asset?

The Indian government wants its citizens to clarify the foreign assets owned by them under Schedule FA of the income tax law. The assessee has to give a slew of details including the country code where their assets are stored, the account number, the peak value hit by the asset, the current or closing balance and so on.

If crypto assets are stored in a foreign wallet such as in Binance and the likes, will these have to be filed under Schedule FA?

Meyyappan Nagappan, leader, digital tax, Nishith Desai Associates, said that without guidance from the tax authorities, there can be no clear answer to this. “There is a provision for declaring foreign assets in ITR forms and even under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. That again is another gray area because nobody knows where the location of a crypto asset is. You could have it in a wallet outside India. So, there is one way of saying that crypto is located where the person is located i.e. if you are in India, you can say that it is located in India but that’s also only a stance. So, it depends on circumstances and also how you want to position your assets.”

Should Crypto Be Declared As Capital Gains Or Business Income?

Even though altcoins such as Dogecoin have become hugely popular, Bitcoin has gained cult status among crypto investors and traders. While most might swap or trade other crypto assets, there is an increasing tendency to hold Bitcoin investments for the long term despite the ups and downs. Such crypto enthusiasts who are invested in Bitcoin for a long term are known as hodlers.

So should such investors be taxed differently than those who look to gain on the margins of trading between coins?

Essentially, the applicable taxes would be dependent on how the investor or individual projects these investments. If they declare themselves as crypto traders, profits from cryptocurrencies could be shown as business income. However, if one projects themselves as investors or hodlers, profits will be taxed in accordance with the capital gains over cryptocurrencies.

Technically, if one holds cryptocurrencies for over 36 months and sells thereafter. The person will be taxed 20% as per long-term capital gains tax. The short-term capital gains will be taxed as per one’s income tax slab.

In India, this has been the most popular way of filing taxes over crypto gains.

Is GST Also Applicable On Crypto Transactions 

Should individuals pay any GST over crypto purchases and should crypto exchanges charge and file GST on these crypto transactions?

Nishith Desai Associates’ Nagappan elaborates, “There are circumstances where a transaction may attract 18% GST. This depends on the nature of their supplies. If it’s a company or a trader who is selling crypto as part of their business, it might attract 18% GST.

However, if the transaction involves two individuals that are not traders, this may not attract any GST, he adds.

On TDS applicability, Nagappan further clarifies that one doesn’t have to pay any TDS in general. Only in certain conditions that trigger Section 206C or 194Q of the Income Tax may attract TDS of 0.1%.

Newly introduced TDS provision Section 194Q says that any buyer who is responsible for paying any sum to a seller for the purchase of any goods of the value exceeding INR 50 lakh in any previous year, shall deduct an amount equal to 0.1% of such sum exceeding fifty lakh rupees as income-tax.

Further, the crypto seller or buyer has to have over INR 10 Cr turnover to attract any TDS over these transactions, says Nagappan.

What If You Mine Crypto? 

Numerous cryptocurrencies such as Bitcoin are created through mining. What tax should this attract? A Cleartax article has argued that since the cost of acquisition of mining a bitcoin cannot be determined as it is a self-generated asset, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets.

However, there is a possibility that the assessing officers may not view mined crypto assets as capital assets but chose income from mining as under ‘Income from other sources’ and hence these assets could be taxed in accordance with the law for such income. No capital gains tax would apply to the mining of Bitcoin, experts say. This position would hold till such time the government amends the tax law.