In the last couple of months, the regulation of cryptocurrency has occupied the centre stage of the Indian policymakers’ agenda. Admittedly, the Indian Government has also been mulling over the taxation of cryptocurrency transactions and businesses. It’s expected that Union Budget, 2022 will set out a regime for crypto taxation. In this article, we summarize some of the key tax issues surrounding this subject that impact various stakeholders, who participate in crypto transactions.
Characterisation of cryptocurrency: At the core of crypto-taxation, is rendering clarity regarding its characterization for tax purposes. Considering that cryptocurrency is a digital asset (with no tangible form) and has been used as a medium of exchange, its characterization whether as legal tender, goods or capital assets is key to discern its tax treatment. Like most countries, the Indian Government is likely to treat cryptocurrency as property and not legal tender for tax purposes.
Classification of cryptocurrency gains: Certain bright line tests regarding classification of cryptocurrency gains as business income or capital gains need to be specified, failing which the general case law to differentiate between trading income from investment income will need to be applied foe every transaction (that may become a complex and contentious exercise).
Income recognition and valuation: As such, transactions in cryptocurrency could include, cryptocurrency to cryptocurrency transactions, purchase and sale of cryptocurrency against cash,purchase and sale of goods and services using cryptocurrency. The manner in which these transactions will be taxed in terms of timing of taxation and valuation need to be addressed. In addition, Government needs to consider other related rules such as, the period of holding that should apply to cryptocurrency for long term capital gains tax treatment, an extension of FIFO rules to determine taxable gains, re-look policy around loss set off.
Withholding tax issues: Under Indian income tax laws, taxes are required to be withheld and collected at source on purchase and sale of goods. The Government needs to clarify if such withholding tax provisions will apply to cryptocurrency transactions.
Tax treatment of miners: Miners earn cryptocurrency by using computers to solve complex mathematical puzzles. The tax treatment of such newly minted coins at the time they are earned should be specified (including mechanisms to determine their fair value). Tax certainty is also required re: the cost of acquisition of such assets, deductibility of expenses incurred in cryptocurrency mining, etc.
Tax return disclosure for foreign assets: Indian income tax laws require tax residents to report details of foreign assets in their tax returns. Tax rules need to clarify in what circumstances will crypto assets be classified as foreign assets. In addition, any record-keeping requirements in relation to crypto transactions should also be clarified upfront.
Impact of cryptocurrency taxation on equalization levy: The application of equalization levy to offshore cryptocurrency exchanges will also need to be tested if cryptocurrency is characterized as goods. Any consideration paid by Indian residents on the online sale and purchase of cryptocurrency to an offshore exchange could be subject to equalization levy.
This will be a defining Budget as India will make an important policy choice that will impact the future of cryptocurrency in India. While few countries such as Belarus, Portugal, Germany and Singapore have liberal crypto tax regimes that either don’t tax or tax limited transactions in cryptocurrency, most countries such as the US, Canada and UK are taxing crypto assets like any other asset. Needless to say as business models and technology evolve, tax policy will need to be responsive to lend tax certainty.
This article was originally published in Times Now on 1 February 2022 Co-written by: Amit Singhania, Partner; Gouri Puri, Partner. Click here for original article
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