Cryptocurrency is a medium of exchange that is digital, encrypted and decentralized. Unlike the currencies used worldwide, there is no central authority that manages and maintains the value of a cryptocurrency. While in the initial stages the point of focus was only on the mining aspect of the cryptocurrencies, over the past few years there has been a sudden surge with regard to the trading of the same.
Cryptocurrency market in India is an unregulated market. With the rampant rise in the popularity of the cryptocurrencies it has been subjected to the spotlight. Given the number of Indians falling for this investment / asset class, the attention of Indian Tax Authorities is on the details. The current dilemma faced by the government authorities is to come up with an efficient way of taxing cryptocurrencies, which in turn puts the crypto investor community in a jeopardy.
A transaction involving cryptocurrency can be analyzed from the viewpoints of income and expenditure. The nature of the transaction would decide if it may be taxable under the Income Tax Act, 1961 or and other laws.
Due to the fact that the regulatory framework regarding cryptocurrencies is uncertain, this article tries to analyze the taxation aspect if at all the same is put under its ambit.
Direct Tax Regime
The direct tax regime is governed by the Income Tax Act,1961 in India. Speaking of the same, it clearly mentions the items which shall be liable to tax under the IT Act.
In the current legal landscape, there is no certainty regarding the taxation of cryptocurrency nor any disclosure requirement about the income earned issued by the Income Tax Department.
Moving on, if cryptocurrency is considered as 'currency', it would not be susceptible to tax under the IT Act. The first reason being, under the Act, the definition of 'income' is an inclusive one, which comprises not only the 'natural' meaning but also the items mentioned under Section 2(24) of the IT Act. But neither the natural meaning nor Section 2(24) of the IT Act includes 'money' or 'currency' as income. Secondly, being a mode of consideration, the tax incidence would be on the transaction and not on the currency.
On the other hand, if cryptocurrency is considered as goods/property, then clearly it would be either covered within the charging provision of 'Profit and Gains from Business and Profession' or 'Income from Capital Gains', depending upon its use for business/profession or not. It would not be out of place to state that the ambit of the word 'income' is not restricted to the words 'profits' and 'gains' and anything which can appropriately be designated as 'income' is liable to be taxed under the IT Act, unless expressly exempted.
Treatment under the head 'Capital Gains'
Section 2(14) of the IT Act defines a capital asset as property of any kind held by the assessee whether or not connected with his business or profession”. This definition of 'capital asset' provided is widest in itself and covers all kinds of property except those expressly excluded under the Act. Therefore, any gains arising out of the transfer of cryptocurrency must be considered as capital gains, if they are held for investment.
Taxability under 'Profit and Gains from Business and Profession'
The tax treatment of cryptocurrencies when held as 'stock in trade' is not the one which faces major difficulties. Under Section 2(13) of the IT Act, the definition of 'business' is inclusive, and comprises of “trade, commerce or manufacture or any adventure or concern of such nature.” Moreover, any continuous activity like trade in cryptocurrencies is included within this definition, and profits realized are taxable thereunder, chargeable under Sec 28 of the IT Act.
Any expenditure incurred for this purpose, such as the purchase of computing power as a capital asset, should be allowable as a deduction per the provisions specified in Sec 30 to Sec 43D of the IT Act.
Taxability under 'Income from Other Sources'
It shall be noted that despite the above stated heads of income quite clearly categorize the appropriate head for taxing the income, however, it can also be stated that as per Section 56 of the IT Act which explicitly state that “income of every kind which is not to be excluded from the total income under this Act and if it is not chargeable to income-tax under any of the heads”, the income earned in this accord shall be taxed under this head and the amount payable shall be in accordance with the applicable tax rates.
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