Budget may bring virtual currencies into tax net

Cryptocurrencies, which are a form of digital money, have been quite the rage among a certain class of investors in recent times.

Given that cryptocurrencies, which are classified as a subset of alternative currencies and virtual currencies, use cryptography and blockchain technology to secure their transactions, they are considered more secure than real money.

Their primary allure is born of the fact that in some quarters, faith in ‘fiat currencies’ — which are issued by governments through central banking mechanisms — has eroded sharply in recent years. In addition, trans-border trades in cryptocurrencies have thus far stayed away from regulatory oversight, which has also made it popular among the Dark Web, where shadowy operators work.

Much of the current mania surrounding cryptocurrencies can be traced back to the stellar performance of Bitcoin, one of the earliest cryptocurrencies, in the past year, in particular. When it was ‘created’ in 2009, it was conceptualised as a global peer-to-peer payment mechanism.

Since then, there has been a mushrooming of many other cryptocurrencies such as Litecoin, Ethereum, Zcash, Dash and Ripple.

Regulatory blind spot

As of today, bitcoin and other forms of cryptocurrencies are not centrally administered or regulated by any specific body such as the Reserve Bank of India. However, the RBI has time and again reiterated that cryptocurrencies have not been legalised in India.

Internationally, quite a few businesses have begun to accept bitcoins (instead of real currency) on sale of goods or services. But they haven’t yet gained traction among Indian businesses.

Tax treatment

Since the concept of cryptocurrencies is quite new to the Indian market, the government has not yet clearly spelt out its stand regarding the taxability of trades in bitcoin and other such virtual currencies. But it is safe to say that a tax levy on cryptocurrencies is just a matter of time in India. The upcoming Budget 2018 could well see a beginning in that direction.

In that backdrop, it is worth exploring the possibility of the levy of a tax on bitcoin and other cryptocurrencies under the following circumstances:

Mining

A view can be taken that the sale of mined bitcoins, in the ordinary course, would give rise to capital gains. However, since the cost of acquisition of a bitcoin cannot be determined, can it be said that it is a self-generated asset, and for that reason, there would be no capital gains tax, as the Supreme Court held in the 1981 case of BC Srinivasa Setty (1981 AIR 972, 1981 SCR (2) 938).

Another view — of not treating bitcoins as a “capital asset” at all — can also arise given that they have not yet been declared “legal” in India. The income tax authorities may choose to tax the value of bitcoins received from mining under the head “Income from other sources”.

Held as an investment

If bitcoins are assumed to be capital assets and are held as an investment, on alienation of the same, the appreciation in value would give rise to long-term capital gains or short-term capital gains, depending on the period for which they were held.

The period of holdingbased on which the nature of the asset is determined may also require clarity as far as bitcoins are concerned.

Held as stock-in-trade

Until such time as this is specifically dealt with, a view can be taken that the income arising out of trading in bitcoins would give rise to ‘income from business’, and such profits would be subject to tax as per the individual slab rates.

Received as consideration

Similarly, unless there is specific tax treatment prescribed on this, one may take the view that bitcoins being received for proffering goods or a service shall be treated on a par with receipt of money. Further, since the recipient received this income out of a business or profession, he would be taxed under the head ‘Profits or gains from business or profession’.

Disclosure requirements: There is currently no requirement in the income tax returns forms mandating disclosure of bitcoins. This too needs to be addressed soon.

The writer is Founder & CEO, ClearTax

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