A cryptocurrency is a digital or virtual currency that is protected by encryption, making counterfeiting and double-spending almost impossible. Many cryptocurrencies are built on blockchain technology, which is a distributed ledger enforced by a global network of computers. Cryptocurrencies are distinguished by the fact that they are not issued by any central authority, making them potentially resistant to government intervention or manipulation.

1. CRYPTOCURRENCY
AND TAXATION
By CA Vinay Bhushan

2. TOPICS DISCUSSED
 What is Cryptocurrency?
 Legal Situation in India
 Types of Cryptocurrency
 How to obtain Cryptocurrency?
 Classification of Cryptocurrency
 Direct tax on cryptocurrency
 Indirect tax on Cryptocurrency
 Taxability of Cryptocurrency in foreign countries
 Compliances affecting Cryptocurrency
 Recent Proposals in India

3. WHAT IS
CRYPTOCURRENCY?

4. What is Cryptocurrency?
CRYPTOCURRENCY
“CRYPTO” “CURRENCY”
Applying the process of
cryptography i.e. converting
readable text into non-readable
text by applying algorithms on
the blockchain technology.
The functions performed by
these digital coins are similar to
fiat currency like dollar, rupee
notes etc. such as store of value,
medium of exchange and settling
debts etc.

5.  Current market capitalization of cryptocurrency is approximately $ 1.7 trillion.
 There are approximately total 9900 cryptocurrencies in the world.
 Bitcoin, the first decentralized cryptocurrency was introduced in 2009 by developer
Satoshi Nakamoto.

6. LEGAL SITUATION IN
INDIA

7. Legal Situation In India
 RBI in 2018 put a ban on banks in dealing with cryptocurrencies by issuing a
“Statement on Development and Regulatory Practices”.
 In 2019 an Inter-Ministerial Committee set up by the Indian government also
recommended that all private cryptocurrencies, except any official digital currency
issued by the state, be banned in India.
 But, in 2020, the Supreme Court in Internet and Mobile Association vs.
Reserve Bank of India [writ petition (civil) no. 528 of 2018] overruled the
decision of RBI and reinstated cryptocurrency.

8.  Currently in India, cryptocurrency is not illegal but is unregulated.
 There are more than 10 million investors of cryptocurrency and crypto assets in India.
 More than Rs. 15,000 crores have been invested in crypto assets by India.

9. TYPES OF
CRYPTOCURRENCY

10. Types of Cryptocurrency
ON THE BASIS OF TECHNOLOGY
Proof of work
This type relies on blockchain
technology and involves bit
mining.
Example: Bitcoin and
Ethereum etc.
Proof of stake
A person can mine or validate
block transactions according to
how many coins they hold.
This type includes EOS, Tron,
etc

11. Types of Cryptocurrency
ON THE BASIS OF PURPOSE
Tokens
They can be tokens that represent
underlying asset like fiat currency,
commodities, etc.
tokens can also be which grant
access rights like token of
ownership, license to software,
streaming of songs, etc.
Stablecoins
Stablecoins achieve their purpose by
pegging their value to one or more fiat
currencies, and keeping reserves of
those currencies as a guarantee of the
token’s value. For example, Tether is a
token whose sole purpose is to remain
at a value that’s on par with the US
dollar at all times.

12. HOW TO OBTAIN
CRYPTOCURRENCY?

13. How to obtain Cryptocurrency?
 Mining- High-powered computers “mine” Bitcoin by solving complex mathematical
puzzles that result in a Bitcoin reward.
 Staking- cryptocurrency staking provides a token reward for determining whether a
transaction conforms to certain protocol requirements.
 Farming- Yield farming, which typically takes place using the Ethereum ecosystem,
involves lending out crypto assets in return for a payment.
 Conventional buying and selling

14. CLASSIFICATION OF
CRYPTOCURRENCY

15. Classification of Cryptocurrency
According to definitions mentioned under various acts, cryptocurrency cannot be
classified as:
 “security” under Securities and Contract Regulation Act, 1956
 “money” under IGST Act, 2017
 “goods” under Sale of Goods Act,1930 or as
 Legal tender by RBI
However, Cryptocurrency and crypto assets can be classified as “capital asset” under
section 2 (14) of Income Tax Act.

16. Classification of cryptocurrency is of utmost importance in order to apply the
appropriate tax head and rates.
Currently, as no proper structure for taxation of cryptocurrency is available in India, the
assets need to be classified and put into appropriate heads for tax payment.
Direct and Indirect Tax both can be applicable on cryptocurrency and crypto assets.
Under Direct Tax, Cryptocurrency can be put under the income heads-
a. Profit and Gains from Business and Profession
b. Capital Gains
c. Income from Other Sources.
Therefore, for computing tax liability accurately, classification of the crypto income
activity is necessary.
How to correctly distinguish the income activity is discussed ahead.

17. DIRECT TAX ON
CRYPTOCURRENCY

18. Direct Tax on Cryptocurrency
 If the cryptocurrency is of business class, it is appropriate to put the income under Profit
and Gains from Business and Profession (PGBP). That is, if the profits from sale
(consideration on sale of goods or services) are from frequent trading then the income can
be classified under PGBP.
Business deduction for equipment and resources for mining businesses except for personal
gain can be claimed.
 If the cryptocurrency is of asset class, the income needs to be classified under Capital
Gains. Income from investment purposes is covered under Capital Gains. Cryptocurrency
generated from mining can be considered as self-generated capital asset that is taxable
under Capital Gains.

19. Any gains after holding a cryptocurrency for 36 months or more would be taxable
as long-term capital gains, while gains accrued during a shorter period would be
categorised as short-term capital gains. These gains are taxable as per the slab rates
applicable to a taxpayer, while long-term capital gains are taxed at the flat rate of
20% with the benefit of indexation
 Gifts received are taxed under the head Income from Other Sources, and are
taxed at individual slab-rates. Consequently, cryptocurrency received as gift will be
taxed under income from other sources at concerned slab-rate and cryptocurrency
received as gift worth INR 50,000 (US$671.07) and above shall be entirely taxable.
Relevant exemptions relating to gifts under Income from Other Sources are also
applicable to cryptocurrency.

20. INDIRECT TAX ON
CRYPTOCURRENCY

21. Indirect Tax on Cryptocurrency
 Cryptocurrency transactions are taxable under CGST Act. Some Indian crypto
exchanges already charge GST on cryptocurrency transactions.
 CEIB has suggested that bitcoins can be categorised under ‘intangible assets’ class and a
GST levy could be imposed on all transactions. The Board has suggested that the
cryptocurrency can be treated as current assets and GST charged on the margins made
in its trading.
 It also recommended that crypto mining should be considered as a supply of service as
an intangible asset chargeable with 18% GST.
 By charging 18% GST, CBIC may collect up to Rs. 7200 crore annually.

22. TAXABILITY OF
CRYPTOCURRENCY IN
FOREIGN COUNTRIES

23. Taxability of cryptocurrency in foreign countries
 While many countries have characterized cryptocurrencies as merely an intangible
asset, some have gone further and classified them as a financial instrument or a
virtual commodity. Certain countries such as Italy, Belgium, and Poland have also
classified them as “currency.”
 While a majority of countries is yet to formulate specific laws and regulations to
govern the cryptocurrency space, some, like the U.S., U.K., and Singapore, have
released detailed guidance in relation to the income tax treatment of
cryptocurrencies.
 The approach taken by the U.S. and the U.K. is to treat mining as the first event of
taxation; whereas in Singapore, mere mining of cryptocurrencies will not lead to any
tax implications, and it is only upon secondary disposal that tax implications arise.

24. COMPLIANCES
AFFECTING
CRYPTOCURRENCY

25. Compliances Affecting Cryptocurrency
 Amendment in Companies Act, 2013 applicable from 1st April, 2021:
Mandatory for companies dealing with virtual currency to disclose profit or
loss incurred on cryptocurrency transactions and the amount of
cryptocurrency they hold in the balance sheet.
 Taxpayers with income more than 50 lakhs must disclose assets and liabilities
in the schedule to assets and liabilities along with cost of acquisition.
 Resident and ordinary resident must disclose foreign income and assets.
 It is necessary to pay income tax on gains from cryptocurrency and disclose
foreign income and assets to avoid a contravention of Black Money
(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

26. RECENT PROPOSALS
IN INDIA

27. Recent Proposals in India
 It is expected in the winter session of the Indian parliament to create a legislation
on cryptocurrency- ‘The Cryptocurrency and Registration of Official Digital
Currency Bill’.
 CEIB proposals to treat cryptocurrency transactions as a supply of service of in
tangible assets attracting a GST of 18% and an equalisation fee of 2%.
 Trading of cryptocurrency and other related transactions like transfer, storage,
accounting etc are also likely to be considered as an act of supply and could be
taxed.
 International cryptocurrency transactions by companies registered in India will be
treated as import or export of goods and as such will be liable to IGST.

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