Cryptocurrencies have been in the spotlight for the past decade, attracting the attention of tax authorities owing to the high prices at which they have been seen trading on exchanges in India and around the world, and the regulatory process of taxation must be decided in light of the current legal environment.
Article 246 of the Indian Constitution gives the Parliament and state legislatures the right to levy taxes. No tax may be levied or raised without the jurisdiction of the state, according to Article 265 of the Constitution. With the adoption of the Constitution (One Hundred and First Amendment) Act, 2016, the Parliament made several changes relating to the imposition of the Goods and Services Tax (‘GST’), including Article 246A, which granted the Parliament exclusive power to make laws concerning interstate trade and commerce. In addition, Schedule VII outlines the areas in which Parliament and state legislatures may levy taxes.
As a consequence, every cryptocurrency transaction can be evaluated from two perspectives: revenue and expenditure. The essence of the transaction, as well as the parties involved, will determine if it is taxable under the Income Tax Act of 1961, the Central Goods and Services Tax Act of 2017, or other rules.
Given that the legislative structure surrounding cryptocurrencies is unknown, this article examines the taxation (or non-taxation) of cryptocurrencies by considering them as both commodities and money, two main approaches currently in use across the world.
DIRECT TAX REGIME
In India, the Income Tax Act regulates the treatment of cryptocurrencies under the direct tax regime. In the current legal landscape, there is no clarity regarding the taxation of cryptocurrencies, nor is there any provision for the Income Tax Department to report the income received.
Moving forward, if cryptocurrency is classified as “currency,” it would not be subject to taxation under the Internal Revenue Code. The first is that the definition of ‘income’ in the Act is broad, encompassing not only the ‘normal’ sense but also the things mentioned in Section 2(24) of the IT Act. However, neither the natural sense nor Section 2(24) of the IT Act recognizes ‘money’ or ‘currency’ as revenue, though it does recognize’monetary tax.’ Second, since it is a mode of consideration, the tax is levied on the transaction rather than the currency. If, on the other hand, cryptocurrency is classified as a product or property, it will be charged under either the ‘Profit and Gains from Company and Profession’ or ‘Income from Capital Gains’ clause, depending on whether it is used for business or not. It is worth noting that the term ‘benefit’ is not limited to the terms ‘profits’ and ‘gains,’ and that everything that can be appropriately designated as ‘income’ is subject to taxation under the IT Act, unless expressly exempted.
- Treatment under the head ‘Capital Gains’
A capital asset is defined as “property of any kind owned by the assessee, whether or not connected with his business or profession” under Section 2(14) of the IT Act. This definition of “capital asset” is the broadest in the Act, encompassing all forms of property except those specifically excluded. As a result, any gains resulting from the transfer of cryptocurrencies must be treated as capital gains if they are kept for investment purposes.
- Taxability under ‘Profit and Gains from Business and Profession’
The tax treatment of cryptocurrencies held as ‘stock in trade’ does not pose significant challenges, as the problems that occur when treating them as capital gains do not apply when they are held in the course of business. The definition of ‘company’ in Section 2(13) of the IT Act is broad, including “trade, commerce, produce, or any adventure or concern of such nature.” Furthermore, any continuous operation, such as cryptocurrency trading, is included under this category, and profits earned are taxable under Sec 28 of the IT Act.
Profits do not have to be in the form of money to be taxable; even though they are ‘in-kind,’ they are taxable. Any costs incurred for this reason, such as the acquisition of computing power as a capital asset, should be deductible under the provisions of Sections 30 to 43D of the IT Act.
INDIRECT TAX REGIME
Since cryptocurrency is regarded as a good/property, the supply of bitcoins is considered a ‘taxable supply,’ and therefore subject to GST. Since bartering is simply an exchange of one good for another, a supply of cryptocurrency as products or property in exchange for other virtual/real goods should technically be considered a ‘barter transaction.’
Any barter exchange, even in its most creative form, has two basic components:
- Products or services are exchanged directly for other goods or services. in addition
- no use of money.
Prior to GST, the incidence of tax occurred when goods were sold in exchange for currency, deferred payment, or some other beneficial consideration under various state VAT laws. Because the word should usually derive meaning, ejusdem generis, from its previous words (i.e. cash and deferred payment), and therefore does not contain an exchange of products for other goods, the phrase ‘some other valuable consideration’ leaves out a broad range of uncertainty. In the case of Sales Tax Commissioner v. Ram Kumar Agarwal, where a transaction of gold bullions in exchange for ornaments was excluded from the scope of sale under Sec 2(h) of the Sale of Goods Act, 1930, the Supreme Court reaffirmed this position. When a transaction is used as a device to conceal monetary consideration, however, courts may unravel the device and include it within the scope of sale.
If cryptocurrencies are treated as commodities, certain transactions may be taxed twice: once on supply (which would otherwise be excluded for a money transaction) and then again on consideration, resulting in an unnecessary increase in tax. This higher tax rate puts cryptocurrency companies at a major disadvantage, reducing their purchasing power. When dealing with foreign purchases, the situation becomes much more difficult.
RBI has requested its own controlled entities (such as banks) to avoid offering fiat (INR) on and off-ramp services to individuals or businesses dealing in cryptocurrencies. This makes it impossible to buy or sell cryptocurrencies in INR through banks. Despite these constraints, India ranks among the top five countries in the world in terms of currency kept (although these cannot be exchanged at the moment), with 44 percent of the global share. Given the uncertainties surrounding Bitcoin and the fact that it is still in its early stages of growth, one thing is certain: Bitcoin will take time to gain widespread acceptance as a currency or means of exchange in India. This would result in the usual reaction of such exchanges, which is to relocate their headquarters outside of India, resulting in the loss of significant future tax revenues. If the government were to allow the trade of these currencies, the treatment for bitcoins would be perfect. The currencies should be regarded as current assets, and the margins that bitcoin exchanges charge their users should be subject to GST. This would ensure that currency trade is limited while also increasing tax revenue for the government.
In today’s scenario, cryptocurrency has the ability to strengthen India’s digital infrastructure while also securing all digital network transactions. In this case, levying taxes on cryptocurrency transactions should be viewed as a positive step rather than a constraint. It’s a two-way street that allows crypto transactions to be tracked and used legally while also providing revenue for the government to spend wisely. It is also vehemently asserted that imposing a tax on cryptocurrency as a policy matter will help to build an optimal climate for traders to feel confident in the knowledge that their money is safe and that the risks associated with trading are minimised.