MUMBAI: With the income tax department slapping tax notices on almost five lakh high net worth individuals transacting in bitcoin, the issue of taxing cryptocurrencies has assumed more importance and urgency in India. The Centre is reportedly planning to bring in a regulatory framework for crypto currencies in the forthcoming Union Budget. This should clear the air on the status of such digital currencies and how they will be taxed. Meanwhile, here is a look at how transactions in cryptocurrencies, mainly bitcoin, may be taxed under various scenarios.
Currency or capital asset: Currency, according to the Foreign Exchange Management (FEMA) Act, 1999, includes currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards and other such instruments, as notified by the RBI. As various entities accept bitcoin as a mode of payment, it appears that it is a currency. But it has not been termed as a currency under the FEMA Act, or as legal tender by the RBI; so, it may not qualify as currency. Whether bitcoin is a currency will remain a matter of dispute until the RBI clears its stand on it. If the RBI declares it to be a currency, any trading in it will be subject to FEMA regulations. Capital gain or business income: According to Section 2 (14) of the Income Tax Act, 1961, a capital asset means a property of any kind held by a person, whether or not connected with his business or profession. The term ‘property’ has no statutory meaning, yet it signifies every possible interest that a person can acquire, hold or enjoy.
Computing capital gains from sale of bitcoins: If gains arising from transfer of bitcoins are treated as capital gains, their further classification into short-term or long-term gain will depend on the period of holding of bitcoins. If a bitcoin is held for more than 36 months, it will be considered a long-term capital asset. If the period of holding is lower, it will be treated as a short-term capital asset.
However, if bitcoins are classified as capital assets, the virtual currency earned from bitcoin mining may not be taxed.
Bitcoins generated during the mining process are classifiable as self-generated capital assets. Since the cost of acquisition of such bitcoins is not available, the taxpayer can take the benefit of judgement of the Supreme Court in the case of B. C. Srinivasa Setty (1981).
Taxation of bitcoin sale by NRI: Suppose an NRI sells bitcoins on an Indian exchange. Would he be liable for taxation in India? Since bitcoin is an intangible asset, income accruing or arising from its transfer outside India by a person who is not a resident in India cannot be taxed in India. Hence, sale of bitcoin by an NRI through an Indian bitcoin exchange may not be taxed in India. Is it goods or service? If bitcoin gets classified as a currency, it will be considered as ‘money’ in the CGST Act and no GST can be charged on its trading. However, exchanging bitcoin to rupees might be considered a service for the purpose of levy of GST under the category of ‘financial services’.
Here, if the supplier charges any commission for providing exchange services, then GST shall be payable at 18 per cent on the commission. If no consideration is being charged for the services, the supplier shall be liable to pay GST at 18 per cent on 1 per cent of the gross amount of rupees paid by the recipient.