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.
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.
So, bitcoins could be deemed a capital asset if they are purchased for investment. Any gain arising on transfer of a bitcoin shall be taxable as capital gain. However, if the transactions in bitcoins are substantial and frequent, it could be held that the taxpayer is trading in bitcoins, and the income would be taxable as business income.
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.
Short-term capital gains are taxable according to the slab rates applicable to the taxpayer. Long-term capital gains are taxed at a flat rate of 20 per cent with indexation benefits (inflation-adjusted).
Taxation of bitcoins earned through mining: If profits earned from bitcoins are taxable as business income, then the bitcoins earned in the ‘mining’ process would also be taxable as business profits.
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).
The court held that if the cost of acquisition of an asset cannot be ascertained, the machinery provision for computation of capital gains will fail. Therefore, no capital gains can be levied on transfer of such assets. This could mean bitcoins generated through mining may be exempt from tax.
Situs (location) of bitcoins for taxation: Bitcoins are intangible assets. For income tax purposes, situs of an intangible asset can vary according to its nature and obligations attached to it. Situs of an intangible property is decided on the basis of the law of the land where protection for the property is sought.
Situs of an intangible asset can be linked with such tangible property with which it is most closely connected. For example, a patent is associated with plant and machinery, and a trademark or brand name is associated with goods. Thus, the situs of bitcoin can be linked with the country where its operating server is located.
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.
There is a conflicting view also. If bitcoin is not considered as currency, any trading in bitcoin would be considered a service. Therefore, the supplier (who is selling the bitcoin) may be required to pay 18 per cent GST on the total value charged by him from the buyer.
Taxability of bitcoin mining under GST: In the bitcoin mining process, individuals process the transactions and secure the network by using specialised hardware. In exchange, they are awarded new bitcoins. In other words, the bitcoin is a consideration awarded to individuals in lieu of their services to secure the network. Therefore, bitcoin miners may be required to pay GST on the fair market value of the bitcoin at 18 per cent.
Is bitcoin trading a current account transaction under the FEMA? Current account transactions include all those transactions that are not capital in nature. This includes remittance for import of goods or services, or remittance for personal purposes, etc. The question whether dealing in bitcoin is a current account transaction or not depends wholly on whether bitcoin is a ‘good’ or an ‘asset’.
If it is not a good, foreign transactions in bitcoin shall be treated as capital account transactions and any dealing in bitcoin would require prior approval from the RBI.
The writer is deputy general manager, Taxmann.com