The upcoming Budget 2022 may specify certain aspects on the taxation of cryptocurrency. The Government may also bring cryptocurrency transactions under the TDS or TCS provisions. The tax rate could be similar to that on lottery, game shows or puzzles, which may be as high a 30% or 40%. Government may also make buying and selling cryptocurrency reportable through Statement of Financial Transactions (SFT). In a way, those who are investing or trading in cryptocurrency are likely to be brought into the tax net.
There may be clarification about the type of income and method of arriving at the income, whether the income is capital gains or business income or other income. Most investors are taking a stand that the gains are capital in nature and hence liable to tax as capital gains.
Cryptocurrency investments are capital assets for tax purposes and their sale treated as transfer taxable under capital gains. In case one trades in cryptocurrency, then the income is business income. The Government may also tax transactions where one does not sell cryptocurrency, but only converts one cryptocurrency to another. Under the definition of capital asset, cryptocurrency could be property or asset held by a taxpayer. The gain or loss arising from sale or exchange falls under capital gains tax. The period of holding applicable is three years, where the gains are short term capital gains taxable as per the slab rates. However, if the period of holding is greater than three years, the gains are taxable as long-term capital gains, with the benefit of indexation and taxed at 20% tax rate.
Another aspect to consider is whether cryptocurrency investments require disclosure under foreign assets. In the absence of clear guidelines, investors may not understand the nature of their cryptocurrency investments and omit to make appropriate disclosure in the ITR. Cryptocurrencies are decentralised in nature, using blockchain technology where transactions recorded over different computers at the same time. Hence, it is difficult to know the location of the cryptocurrency. Also, cryptocurrency users have a private key and use pseudonyms which make the transactions highly secure. The nature of cryptocurrency makes it difficult to bring in regulation to acknowledge it and put in place procedures to track the transactions.
While companies holding cryptocurrency have to abide by rules of disclosure specified for profit or loss arising from cryptocurrency transactions, disclosing holdings, deposits and advances for the purpose of trading or investing in cryptocurrency. However, individuals and other taxpayers need clarity on the taxation and disclosure in the ITR filing. A detailed regulatory framework should help clear many doubts on the disclosure, accounting and tax treatment.
India may issue guidance with FAQ on the tax treatment and disclosures similar to other countries. The US, UK and Switzerland adopted the view that cryptocurrency is property and hence a capital asset for taxation purposes. The US provided guidance on taxation of cryptocurrency and classified cryptocurrency as ‘property’ for tax purposes. Detailed guidance published specifies tax and reporting obligations with respect to cryptocurrency. The UK published crypto manual to help understand the tax implications arising from cryptoassets. A sale of cryptocurrency is liable to capital gains tax. Switzerland too classifies cryptocurrency as assets or property and requires taxpayers to report in the tax returns.
The value of cryptocurrency is not based on an underlying asset, but based on the forces of demand and supply. The prices are extremely volatile and makes cryptocurrency highly risky. The volatility is another factor which makes it difficult to establish rules of fair market value in case of barter transactions. The Government could consider providing a basic threshold exemption for barter transactions of goods and services bought using cryptocurrency, where the goods or services are liable to GST. However, gains arising on other exchange of one cryptocurrency to another may need fair market value rules for taxation.
Crypto exchanges operating in India do not fall under any regulatory framework such as that of SEBI or RBI. Consequently, they have no specific compliance requirements and reporting mechanism of the crypto trades. The RBI had directed banks and NBFCs to provide banking facilities to crypto exchanges after carrying out prescribed KYC procedures. Crypto exchanges could act as a good source of information once brought under a reporting framework.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 seeks to ban all private currencies and allow for certain exceptions to promote the underlying technology of cryptocurrency and its uses. The bill was not introduced in the Parliament and the matter is under discussion with various stakeholders.
Pending the introduction of any regulations or laws governing cryptocurrency, one can expect some guidance on the taxation and disclosure of income from cryptocurrency in the upcoming Budget 2022.
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