Digital Currency Taxation Proposals – Features And Way Forward

Introduction

On February 1st, 2022, during her budget speech[1], India’s Finance Minister made a huge announcement which is somewhat considered as a setback for the crypto industry. She announced that any income derived from the transfer of digital assets including cryptocurrencies, shall be taxable at a rate of 30% in addition to TDS on payments made in relation to the transfer of virtual digital assets at 1% of the consideration crossing the monetary limit. This proposal as stated earlier has been taken as a setback for the crypto industry, however, many have taken it as a sign of legalization of cryptocurrencies. How much this proposal is a setback to the crypto industry and how much it paves the way for legalising of the same, shall be dealt by the present Article.

Cryptocurrency is an encrypted data string that denotes a unit of currency in digital medium[2]. As per the estimates by Nasscom and WazirX[3], the growth of Indian crypto market has been exponential and the investment in crypto assets is expected to touch $241 million by 2030. Furthermore, India has the highest number of cryptocurrency owners in the world. This analysis and data suggests that India really has entered into the crypto market and therefore, laws and regulations are to follow.

STATUS QUO ON CRYPTOCURRENCY

Currently, there is no law which regulates cryptocurrencies, and so the field is majorly unregulated. Therefore, as of now, dealing in cryptocurrencies is lawful. Earlier, the government was adamant in bringing a legislation totally or partially banning cryptocurrencies. However, the stance seems to have somewhat changed as indicated by the recent introduction of taxation for cryptocurrencies.

In the budget 2022-23, the government has proposed to regulate cryptocurrencies as of now instead of completely banning it. It introduced 30% tax on cryptocurrencies. In furtherance of the same, a number of provisions have been proposed in the Income Tax Act. The same has also been done in order to regulate investments in cryptocurrencies, NFTs, or other virtual digital assets. The provisions shall be applicable from the assessment year 2023-24. This implies that any dealing in virtual digital assets such as its transfer on or after April 1, 2022 shall be taxable in accordance with the proposed Finance Bill, 2022.

FEATURES OF TAXATION PROPOSALS

Firstly, the proposal has introduced the concept of Virtual Digital Assets (VDA) and has laid down an exclusive definition of the same in an entirely new clause i.e., 47A to Section 2 of the Income Tax Act[4]. It includes anything that cumulatively fulfils the following essentials as Virtual Digital Assets:

  1. Any information, code, number, or token generated by way of cryptographic or other means but does not include Indian or foreign currency;
  2. Which provides digital representation of value exchanged with or without consideration;
  3. With the promise or representation of having inherent value or functions as a unit of account or store of value, including its use in any financial transaction or investment but not limited to investment scheme; and
  4. Which can be transferred, stored, or traded electronically.

Further it lays down the scope of the definition by including the following as VDA:

  1. A non-fungible token (NFT) or any other token by whatever name called
  2. Any other digital asset as may be notified

More importantly, the central government has been vested with the power of excluding any qualifying asset from the definition of Virtual Digital Asset.

Provisions for Taxability

In order to accommodate the taxation of cryptocurrencies and other virtual digital assets, Section 115BBH has been inserted in the Income Tax Act[5]. The Section lays down the following:

  1. Firstly, that the income from sale of a virtual digital asset including cryptocurrency and NFTs, shall be taxable at a base rate of thirty percent.
  2. Secondly, the income shall be calculated by subtracting cost of acquisition from the sales consideration.
  3. Thirdly, nothing else other than the cost of acquisition shall be the deduction available for determining tax amount.
  4. Fourthly, loss from any other source of income shall not be set off against the income from virtual digital assets. Similarly, loss from the sale of VDAs shall not be set off against income from any other source.
  5. Fifthly, the loss from the sale of virtual digital assets shall not be carried forward.
  6. Sixthly, gifting of virtual digital assets has been brought under the ambit of taxation. The same has been done by including it in the definition of property as clause (d) of the Explanation to clause (vii) of Section 56. This implies that gifts of valuation more than Rs. 50,000 shall be taxable at the hands of recipient.
  7. Seventhly, deduction of 1% of the payment amount at source and deposition of the same with the government has also been proposed.
  8. Lastly, small transactions have been proposed to get exemption from TDS requirements.

Issues in the Proposal

The proposal clears a few things, however it is not enough to cover all the issues which may arise in the area. Some of the issues in the proposal are as follows:-

  1. The terms acquisition cost and sales consideration have not been defined. This poses a question—Whether brokerage fee paid for arranging the transaction shall be considered as part of the cost or shall be deducted from sales consideration?
  2. Secondly, the amendment to the Income tax Act shall come into operation from April 1, 2022, therefore, the taxability of income from virtual digital assets is open for interpretation for the financial year 2021-22. This creates a room for interpretation and government may be required to clarify things further.
  3. As we know, tax base widens when it is collected through TDS. Section 194S has been proposed providing the TDS deduction to be at 1 per cent[6]. However, for specified persons, TDS has to be deducted only if the transaction amount exceeds 50,000 in a financial year. For persons other than specified ones, TDS has to be deducted if the valuation of transaction exceeds 10,000 in a financial year. Since crypto transactions are not similar to monetary or asset transactions, the TDS system will find it difficult to effectively govern the crypto transactions. For instance, in crypto transactions, the buyer is necessarily not aware of the whereabouts of seller. Therefore, it will be near impossible to deduct TDS of the seller. However, the buyer can deduct TDS of the intermediary portal subsequently getting reimbursed from them, but it again would be very inconvenient. What should have been done is that the TDS should have been deducted by the portal as an e-commerce operator under Section 194O.
  4. If a non-resident happens to purchase Virtual Digital Asset from a resident, the same would require a TAN number in India and subsequently deducting the TDS. This again seems to be a very cumbersome process.
  5. Another problem with the proposals is that the taxability in relation to GST transactions is not very lucid.

Does Taxing OF Cryptocurrency Make it Legal?

Taxation of Virtual Digital Assets have led to a clarity on the issue of taxability of cryptocurrency, however, it is still very unclear whether the government is going to ban the currency or legalise it by regulating it. It is understood that mere taxing of a transaction does not result in its legality. Legality of cryptocurrencies will be determined by a proper legislation such as the upcoming ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’[7]. Taxing of a transaction does not make it lawful as Income Tax Act taxes illegal transaction as well. It taxes the transactions irrespective of their nature, whether lawful or unlawful. Therefore, the stance of government on legalisation is yet to be formalised.
TaxaTION of Cryptocurrency under Foreign Jurisdictions

United States: Under US law, the holding of virtual currencies as an investment, its use to pay for goods and services, and its sale or other exchange, generally results in tax liability. Further, the IRS rules consider cryptocurrency as property instead of currency for tax purposes, and taxes the transactions involving crypto between 10% to 20%[8]. However, buying crypto with cash, holding it, transferring it between wallets and donating it to a recognised charity are exempted from taxation.

United Kingdom: Under the UK law, cryptocurrency is considered and treated as a capital asset for taxation purposes[9]. Therefore, the rates for capital gains are applied on the transactions involving cryptocurrencies such as its disposal, selling for money, exchanging for a varied token, using for payment for goods and services, etc. However, gifts to one’s spouse or civil partner are exempted from taxation. The tax rate for capital gains is 20% for higher and additional rate taxpayers, and 10% for basic rate taxpayers. The capital gain up to £12,300 even involving cryptocurrencies is exempted.

Germany: The taxation system of Germany for cryptocurrencies is a little strange. It treats Cryptocurrency as private money and not a capital asset[10]. There is no tax on crypto sold, spent, or swapped, after holding it for more than 1 year. However, holding it for less than 1 year is taxed, if the profit arising out of the transaction goes beyond €600. A staked crypto held for more than 10 years is subject to no tax.[11]

Singapore: In Singapore, holding of cryptocurrency by individuals or businesses for long term investment purpose is not taxed[12]. The reason behind the same is that in Singapore there is no capital gain tax. However, the profits earned after buying or selling virtual currencies in the course of business are taxed as per the tax on income.
Conclusion

Firstly, clarity on taxation of cryptocurrencies and other digital assets was required and the proposal does in a way address it. There are very few countries which have a tax regime in place for virtual digital assets, so India has done well in laying it down early.

As stated earlier, cryptocurrency market is moving ahead with a strong pace and is expected to boom in the next few years. The trade in Virtual Digital Assets such as cryptocurrency and NFTs is increasing at a rapid pace. There was a requirement for clarifying the position on taxability of digital virtual assets. The proposals have surely brought a clarity on some issues; however, some others (as mentioned above) are yet to be addressed. More specifically, there is no clarity on Goods and Services Tax on these products. This means that people have been discouraged from dealing with these kinds of products. Finally, it is important to note that the legality of digital assets cannot be concluded from the proposals, and the proposals do not intend to lay it down. Therefore, taxation maybe considered as a setback for the crypto industry, however it clarifies a lot of important issues and has the tendency to pave the way for regulation instead of a complete ban, thus, it is both a boon and a bane for the industry.

Author: Shawaiz Nisar- student at Rajiv Gandhi National University of Law, Punjab, in case of any queries please contact/write back to us via email vidushi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

References:

[1] NIRMALA SITHARAMAN – Union Budget Speech (February 1, 2022) Available At <https://www.indiabudget.gov.in/doc/budget_speech.pdf

[2] Cryptocurrency Definition, Trend Micro, Available At https://www.trendmicro.com/vinfo/us/security/definition/cryptocurrency

[3] Tarish Vasant, CryptoTech Industry in India – A report by Nasscom and WazirX (November 29, 2021) WazirX Available At <https://wazirx.com/blog/cryptotech-industry-in-india-a-report-by-nasscom-and-wazirx/

[4] THE FINANCE BILL, 2022 (Bill No. 18 of 2022) Available At <https://www.indiabudget.gov.in/doc/Finance_Bill.pdf>

[5] Id.

[6] THE FINANCE BILL, 2022 (Bill No. 18 of 2022) Available At <https://www.indiabudget.gov.in/doc/Finance_Bill.pdf>

[7] The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

[8] IRS Notice 2014-21, Internal Revenue Bulletin: 2014-16 (April 14, 2014) Available At <https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21

[9] Policy paper, Tax on cryptoassets, from HM Revenue & Customs Gov.UK (December 19, 2018)  <https://www.gov.uk/government/publications/tax-on-cryptoassets

[10] Bitcoin Taxation in Germany, Winheller Attorneys at Law & Tax Advisors <https://www.winheller.com/en/banking-finance-and-insurance-law/bitcoin-trading/bitcoin-and-tax.html

[11] Germany Crypto Tax Guide 2022 Koinly (18 MAY 2021) Available At <https://koinly.io/guides/crypto-tax-germany/

[12] Taxable & Non-Taxable Income, Inland Revenue Authority of Singapore Available At <https://www.iras.gov.sg/taxes/corporate-income-tax/income-deductions-for-companies/taxable-non-taxable-income

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