This Article is submitted by –
- Kumar Kartikeya, a second year student(Semester-3), pursuing B.A.L.L.B(Hons.) from Hidayatullah National Law University
Taxation is an important aspect when it comes to understanding Bitcoins. There is a lot of ambiguity regarding the legal status of Bitcoins, thus it is very important to understand how the bitcoin traders are tackling the imposition of taxes on it. Business in its basic form is an occupation, business or a commercial activity. Bitcoin is a commercial activity having a clear track of payments and transactions taking place in India as well as other countries.
Ways of Income Tax imposition on Bitcoin-
Being a commercial activity, it is a business. Therefore, like any other business, whenever there is a profit or loss due to purchasing and selling of bitcoins, income tax has to be paid. Income tax can be imposed in two ways- One, when the businessman provides for a mode, where he accepts trading with bitcoins, the income which is generated by him in this way can be treated as a business income and tax can be imposed on that business income. Secondly, when a person purchases or sells bitcoins as a commodity, tax can be imposed on the basis of capital gains. In the context of capital gains, assuming bitcoins are taxable, the question arises whether they should be treated as ‘Long term capital gains’ or ‘short term’? The question is important because the rate of taxation in the case of ‘short term capital gains’ is 30% on the income more than 10 lakh rupees and in the case of ‘long term gains’, it is 20%1. In either case the tax will not be on bitcoin, but on its rupee equivalent in India. In India, taxation is supervised under the Income Tax Act, 1981 which takes into account the worldwide income of the residents of India. They can be considered as a currency, if a law is passed to that effect in India, as well as a capital asset, both of which can be taxed. As per Indian law when a capital asset is sold, the profit or gain which arises out of the sale, which is also called ‘capital gains’ is treated as a taxable income2. The tax liability is then calculated by deducting the cost of acquisition of the capital asset from the sales proceeds and then applying the rate of tax to the calculated difference. As per the tax code in India, Incomes, gains and profits are taxable even if they are received in money’s worth instead of real money or currency, because they can be converted to their real money equivalent. While cryptocurrency brokers aren’t required to issue 1099 forms3 to clients, traders are supposed to disclose everything to the IRS or face tax evasion charges. Taxable transactions include:
- Exchanging cryptocurrency for fiat money, or “cashing out”
- Paying for goods or services, such as using Bitcoin to buy a cup of coffee
- Exchanging one cryptocurrency for another cryptocurrency
- Receiving mined or forked cryptocurrencies
The following are not taxable events according to the IRS:
- Buying cryptocurrency with fiat money
- Donating cryptocurrency to a tax-exempt non-profit or charity
- Making a gift of cryptocurrency to a third party
- Transferring cryptocurrency between wallets
GST implications on Bitcoin-
Goods and Services Tax (GST) can also be imposed on bitcoins. The 2017 Budget increased the rate to 16-18% from 14%4. For it to apply on bitcoins, they need to fall under the category ‘taxable services’ which are defined as “services to any person by any person, in relation to online information or database access or retrieval or both in electronic form through computer network”6. In this regard it can be highly inferred, that the activity of Mining6(process of adding transaction records to the bitcoin’s public ledger called the Blockchain) can be considered as a ‘taxable service’ under the finance act, 1994 because mining is one of the ways a person can legitimately earn his bitcoins with his proof of work. It can be found that the growth of bitcoins appears to be a threat to the banks and the government, because it rules out the need for a centralized regulatory authority for the circulation and regulation of the currency and allows the people to trade according to their own discretion. Further, the cost of mining at a faster rate is very high because of the computational cycles involved. Thus, the miners have to pool their money and resources for the fulfilment of their endeavour. Deducting the cost of electricity and other utilities, such as computer software and hardware parts, the profit in the short term would be minimal and there would be profit only in long term process of mining and selling. Given the nascent state of development of Bitcoin , it is going to take time to be accepted as a currency or means of exchange in India. This particular factor will result in reflex activities like exchanging shifting base outside India and losses of huge potential tax revenues.
Bitcoin’s benefits remittance market-
Since, a long time India has been the world’s largest remittance market. The majority of remittance is in small amounts and for these small amounts Indians have to pay 15% of the fee to companies like Paypal, Western Unions or to banks as transfer or exchange rates. Now, these virtual currencies make it easier to send small amount of this remittance back home (that is back to India), adding to its wealth and saving a lot of money which is paid to third parties as their fees.
An Ecosystem of strong regulatory oversight which addresses the challenges of trust, relevance and sustainability integrating the imperatives of existing economies and national governance will be able to provide right framework for providing resilience to market integrity, consumer protection and getting integrated with the mainstream economic activity. Therefore, there is a need for not only national legal standards to emerge on operational frameworks of cryptocurrencies but also a global trade order to evolve regulating cryptocurrencies given its for cross border flows causing large scale extraterritorial risks.
“The views of the authors are personal“