Union Budget 2021: Crypto Startups Seek Clarity On GST, Taxation On Earnings

As John McAfee, founder of the eponymous security software company and a crypto enthusiast, spent his 110th day in a Spanish prison, the Bitcoin, the most valuable cryptocurrency, breached the $40K mark (Jan 7, 2021) from $10.5K on Oct 3, 2020.

After predicting in 2017 that Bitcoin would hit $1 Mn, McAfee had been through a tough time, ‘eating his words’ and running away from the U.S. authorities for a slew of alleged tax frauds until he was arrested by the Spanish police.

As the legal and policy landscape surrounding cryptocurrencies still require a lot of clarity and standardisation, authorities across the world will continue to raise crypto-related tax fraud allegations. India is no exception, either. In 2018, the country’s Income Tax Department issued notices to more than 100K HNIs who had invested in cryptocurrencies like Bitcoin without declaring the same in ITRs. In fact, unlike the US, Japan, Australia and some other countries, crypto traders and entities in India often find themselves in tricky situations as there is not much clarity about  the taxability of cryptocurrencies.

Understandably, the lack of clarity regarding taxation stems from the lack of a dedicated policy on cryptocurrencies and their use cases.  As the finance minister presents a ‘never-before’ Union Budget on Feb 1, crypto stakeholders will be looking forward to greater clarity regarding India’s crypto policy and taxation on crypto gains.

Union Budget 2021: What The Crypto Community Expects From FM Nirmala Sitharaman

“Crypto is a new investment class, and clarity about its taxation will add legitimacy to the crypto ecosystem in India.” – Nischal Shetty, founder and CEO, WazirX

A few weeks ago, the Times of India published a report on the Central Economic Intelligence Bureau’s tax proposal on cryptocurrencies. Although income tax officials termed the news story as “speculative” and “unfounded”, Ashish Singhal founder and CEO of CoinSwitch Kuber thinks the first part of the recommendation – that of ‘treating cryptocurrencies as an intangible asset’ – will be a huge booster for the crypto industry, determining its position among asset classes. But the second part that proposes ‘charging 18% GST’ is unreasonable if applied on the overall amount paid for purchasing cryptocurrencies, instead of the fees paid.

According to Shivam Thakral, founder and CEO of BuyUCoin, most of the registered crypto exchanges currently charge around 18% GST over the commission fees paid by retail investors during transactions. Retail investors are supposed to show profits made from crypto selling under ‘income from other sources’ and are taxed according to their respective income slabs.

But in several cases, much depends on how income tax assessing officers interpret the earnings from crypto. Sumit Gupta (founder and CEO of CoinDCX), Singhal, Shetty and other industry leaders agree that the Indian government has not laid out clear guidelines for crypto investors to declare their earnings. Most homegrown crypto exchanges advise investors to declare their crypto earnings as ‘income from other sources’ because that is the prevalent practice.

However, profits from cryptocurrencies are not easy to calculate due to their volatility and complicated nature, which often impact their pricing. For instance:

• Forking is a common phenomenon in the crypto world, making it difficult for authorities  to determine the purchasing cost of newly acquired cryptocurrencies. In Japan, it is zero.
• Next comes another issue: How to determine the earnings made via crypto mining?. Incidentally, there is a huge cost attached to the mining hardware.
• What kind of tax should be imposed if cryptocurrencies are used as part of a barter system? Will the tax amount be the same regardless of how cryptocurrencies have been  acquired – through purchasing, mining or gifting?

The complicated nature of crypto makes it difficult to determine the pricing if these are not directly purchased.

Avinash Shekhar, COO of ZebPay, clarifies things further. “As we do not have crypto-specific tax laws yet, investors have to take their best guess when paying taxes. To most investors, crypto assets are just like other assets which come under the capital gains tax. HODLers, or those who hold these assets for long periods, generally over three years, sometimes pay long-term capital gains rate. This is similar to what you would do when selling gold or a house after many years.”

Currently, a 20% tax is levied on long-term capital gains and 15% is taxed for the short term. Shekhar, however, thinks this clarification or categorisation is not watertight.  Short-term traders may think their earnings come under the short-term capital gains category, but tax authorities may not see it that way. Other crypto investors self-report their crypto earnings under ‘income from other sources’ that calls for a higher tax rate.

Sathvik Vishwanath, cofounder and CEO of Unocoin, concurs. “We have seen people treating these as capital assets (unless someone is a frequent trader for whom it will be income from other sources), and hence, the classification of long-term capital gains if they are holding crypto for more than two years. Otherwise, it will be short-term capital gains.”

Classification is the need of the hour, at least for taxation purposes, agree the crypto founders and executives who spoke to Inc42. According to Vishwanath of Unocoin, GST at the point of sale or purchase must be determined as well as income tax implications (which are less ambiguous, by the way). Gupta of CoinDCX says, “The (GST) percentage should be conducive for the industry as it is still in a nascent stage and needs all the support from the government.”

‘Policy May Wait’

Singhal of CoinSwitch Kuber wants to focus on the issue that has plagued the crypto industry for long. “The finance bill should clear the air around the legality of cryptocurrencies in India. It is long overdue. Other nations are progressing by leaps and bounds in this space. Therefore, quick and positive action from the government is crucial for the country to stay in the race and evolve into a crypto powerhouse.”

However, given the fact that the past committees constituted by the finance ministry have recommended a complete ban while presenting the draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill 2019, the crypto investors as well as startups at large are not in haste when it comes to demanding a crypto policy.

The stakeholders point out the latest global developments that India should take note of while drafting a crypto policy.

A look at the global scenario will not be out of context here. China has already developed its e-currency called DCEP (digital currency electronic payment), and Chinese crypto investor and entrepreneur, Chandler Guo, says, “One day, everyone will use China’s digital currency.” Other countries like Russia, Ecuador, Senegal, Singapore, Tunisia, Estonia, Japan and Palestine have either developed their fiat cryptocurrencies or are in the process of developing it. Although the Reserve Bank of India ‘unofficially’ commissioned a similar pilot project to the IIT Kanpur, it had been apparently left in the middle as cryptocurrencies were biting the dust throughout 2019 and then the Covid-19 pandemic struck.

In fact, the lack of policy has not only derailed the eCurrency project but also impacted the entire digital currency ecosystem in India. But the crypto startups are not keen to have a policy thrust upon them without multilevel discussions. Instead, they are willing to wait and watch.

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