NEW DELHI: While the much-awaited cryptocurrency bill, which was to be presented in Parliament in the winter session, has been delayed, the Centre is preparing to adjust the income tax rate for cryptocurrency investors in the upcoming budget. Many are already paying taxes as ‘capital gains’ on the gains made from the sale of cryptocurrency.
So far, the government has not yet granted any status of legal tender to cryptocurrencies. In 2018, RBI tried to impose a ban by restricting banking facilities to crypto exchanges. However, the ban was overturned by the Supreme Court. The government is mulling changes in income tax laws to bring cryptocurrencies under the tax net, and some changes that could form part of the 2022-23 Budget. The Centre is likely to classify cryptocurrency as ‘capital assets’, similar to the US and UK regulations during the upcoming Budget. According to the Economic Times, the tax burden on cryptocurrency investors could rise to anywhere between 35 and 42 percent on crypto assets.
Capital assets
“Under direct taxes, gains from cryptos may be classified as ‘capital gains’ if they are classified as ‘capital assets’. When classified as capital gains, the immediate next question is what should be the period of holding for these assets to be considered short term or long term. We recommend a period of 3 years; assets held beyond 3 years should be considered as long term assets. Now the next question arises as to whether cost indexation should be allowed and if a concessional rate of tax of 20% should be considered for long term holding. Short term gains are taxed at slab rates,’ says Clear’s Gupta.
In short, short-term capital gains tax will be leviable if crypto assets are held for less than three years. If the crypto-assets are sold after holding the investment for three years they will be treated as long-term investments and taxed at 20% with indexation benefit.
So, what is this confusion about business income?
Those who trade in cryptocurrencies often, i.e. have high volume of transactions coupled with high frequency and exit in a short period of time without the intention to gain from holding over a longer term, must report it as business income.
“When any income is reported as business income any related expenses are allowed to be claimed. Such net income is taxed according to slab rates applicable.
What about GST?
Another aspect of reporting as business income is whether GST should apply. “Goods and Services Tax may become applicable on the buying and selling of cryptocurrencies as it may be treated as the supply of goods or services. The Central Economic Intelligence Bureau (CEIB) has proposed categorising cryptocurrency as intangible assets and applying GST on all crypto transactions. Since the government has not yet defined its taxability and the proposal is under discussion, a general rate of 18% may likely become applicable going forward,” said Gupta.
Income from other sources
Crypto-assets can also be reported as ‘income from other sources’ while filing income tax returns and then taxed as per the applicable tax slab of the taxpayer.
Also, there are views to treat the income from crypto assets as ‘speculation business income’ and taxed as per the highest tax slab. However, till any clarification is received from the income tax department, the taxpayers can benefit from classifying it as capital gains or ordinary business income.
TDS/TCS on purchasing cryptocurrencies
The government could also consider levying TDS/TCS on sale and purchase of cryptocurrencies above a certain threshold and such transactions should be brought within the ambit of specified transaction for the purpose of reporting to income tax authorities, Nangia Andersen LLP Tax Leader Aravind Srivatsan was quoted as saying by PTI. Also, a higher tax rate of 30 per cent should be levied on the income arising from the sale of cryptocurrency, similar to winnings from lottery, game shows, puzzle, etc, he added.
How big is the Indian market for cryptocurrencies?
India has close to 15 million crypto investors, and is the world’s second-largest country when it comes to global crypto adoption, as per market research firm Chainalysis. India’s market grew 641% over the past year and Pakistan’s 711%, showed data analysed by Chainalysis, using a metric that estimates the total cryptocurrency received by a country.
“Large institutional-sized transfers above $10 million worth of cryptocurrency represent 42% of transactions sent from India-based addresses, versus 28% for Pakistan and 29% for Vietnam,” the report said. “Those numbers suggest that India’s cryptocurrency investors are part of larger, more sophisticated organizations.” India now has two crypto unicorns and over 350 crypto startups.
How are they being offered as ESOPs in India and how will it be taxed?
Many cryptocurrency exchanges have launched their own tokens and are offering them to their employees as part of their annual compensation, similar to an employee stock ownership plan (ESOP). It also gets linked to employee performance in some circumstances. Apart from exchanges, issuing tokens as incentives to employees is gaining popularity among startups too. However, according to tax experts cryptocurrency or coins given to employees should be taxed on their actual market price in the year the employee received them. Income tax will only be triggered in the year when the employee actually gets the money.
“There are several smart contract standards on Ethereum that have been designed specifically to facilitate transactions in private company shares. One of the biggest advantages of ESOPs through crypto tokens is allowing private companies to restrict the further sale of stock options to a specific whitelist of approved parties. From a tax perspective, offering ESOP through crypto is fraught with risk as it enters unchartered territory in income tax law. The FY20 budget amendment for a more attractive deferred tax payment structure* for ESOPs of eligible startups is very likely not going to extend to crypto tokens in the eyes of the taxman. The interpretation of the taxman will be that these tokens are nothing but salary and should be taxed in the year of receipt at its market value so startups should be prepared for this eventuality unless the Government specifically includes cryptocurrency in the definition of “specified security” as per the Securities Contract Act,” said Harsha Bhuta, lawyer and partner at Bhuta Shah & Co LLP.
Since, cryptocurrencies are still operating in the gray area, how does a crypto index help investors?
On January 1, CryptoWire, the global crypto super app launched India’s first index of cryptocurrencies — IC15. The IC15 is a rule-based broad market index by market capitalization, which tracks and measures the performance of Top 15 widely traded liquid cryptocurrencies listed on leading crypto exchanges of the world. As of January 16, the index was down by 2,039 points (-3.03%) at 65,292.45 points. Bitcoin (BTC) slid Friday, wiping out previous day’s gains, though staying within the past few weeks’ trading range of roughly $40,000 to $44,000. Other major alternative cryptocurrencies too declined on fears that the Federal Reserve will move within the next few months to start raising interest rates for the first time since 2018.
Similar to Sensex and Nifty for equities, a Crypto Index is designed to serve as a benchmark for the performance of a selection of cryptocurrencies that are listed on recognized, open exchanges while meeting liquidity and market capitalization criteria. It allows building subsequent ETF products which allow investors to invest in a group of cryptocurrencies and avoid the risk of holding a single digital currency.
“The cryptocurrency industry also offers a range of thematic investing where baskets of cryptos can be generated based on a theme. For instance there are products like Coinzak where you can invest into theme-based coin baskets, which are nothing but portfolios of cryptocurrencies or tokens aligned intelligently to track a particular theme such as NFT or Defi… An index captures most of the transaction movement, which will aid investors to make information-driven decisions and would act as a base tool for crypto enthusiasts,” said Gaurav Dahake, CEO & Founder, Bitbns.
How will crypto ETFs be taxed?
“From a tax perspective, the sale of crypto ETFs tokens will have similar tax implications on the transfer of any cryptocurrency. As currently there is no provision under the Income Tax Act that provides for the transfer of cryptocurrencies, the most likely tax position is that such income should be taxed as capital gains unless a seller is a trader by occupation, which they should be taxed as business income. Although a position can be taken by the revenue authorities that such trading is treated as speculation income which would lead to a huge deterrent in investing in cryptocurrencies. The upcoming Budget may offer more clarity on this burning issue,” said Bhuta.
So far, the government has not yet granted any status of legal tender to cryptocurrencies. In 2018, RBI tried to impose a ban by restricting banking facilities to crypto exchanges. However, the ban was overturned by the Supreme Court. The government is mulling changes in income tax laws to bring cryptocurrencies under the tax net, and some changes that could form part of the 2022-23 Budget. The Centre is likely to classify cryptocurrency as ‘capital assets’, similar to the US and UK regulations during the upcoming Budget. According to the Economic Times, the tax burden on cryptocurrency investors could rise to anywhere between 35 and 42 percent on crypto assets.
Capital assets
“Under direct taxes, gains from cryptos may be classified as ‘capital gains’ if they are classified as ‘capital assets’. When classified as capital gains, the immediate next question is what should be the period of holding for these assets to be considered short term or long term. We recommend a period of 3 years; assets held beyond 3 years should be considered as long term assets. Now the next question arises as to whether cost indexation should be allowed and if a concessional rate of tax of 20% should be considered for long term holding. Short term gains are taxed at slab rates,’ says Clear’s Gupta.
In short, short-term capital gains tax will be leviable if crypto assets are held for less than three years. If the crypto-assets are sold after holding the investment for three years they will be treated as long-term investments and taxed at 20% with indexation benefit.
So, what is this confusion about business income?
Those who trade in cryptocurrencies often, i.e. have high volume of transactions coupled with high frequency and exit in a short period of time without the intention to gain from holding over a longer term, must report it as business income.
“When any income is reported as business income any related expenses are allowed to be claimed. Such net income is taxed according to slab rates applicable.
What about GST?
Another aspect of reporting as business income is whether GST should apply. “Goods and Services Tax may become applicable on the buying and selling of cryptocurrencies as it may be treated as the supply of goods or services. The Central Economic Intelligence Bureau (CEIB) has proposed categorising cryptocurrency as intangible assets and applying GST on all crypto transactions. Since the government has not yet defined its taxability and the proposal is under discussion, a general rate of 18% may likely become applicable going forward,” said Gupta.
Income from other sources
Crypto-assets can also be reported as ‘income from other sources’ while filing income tax returns and then taxed as per the applicable tax slab of the taxpayer.
Also, there are views to treat the income from crypto assets as ‘speculation business income’ and taxed as per the highest tax slab. However, till any clarification is received from the income tax department, the taxpayers can benefit from classifying it as capital gains or ordinary business income.
TDS/TCS on purchasing cryptocurrencies
The government could also consider levying TDS/TCS on sale and purchase of cryptocurrencies above a certain threshold and such transactions should be brought within the ambit of specified transaction for the purpose of reporting to income tax authorities, Nangia Andersen LLP Tax Leader Aravind Srivatsan was quoted as saying by PTI. Also, a higher tax rate of 30 per cent should be levied on the income arising from the sale of cryptocurrency, similar to winnings from lottery, game shows, puzzle, etc, he added.
How big is the Indian market for cryptocurrencies?
India has close to 15 million crypto investors, and is the world’s second-largest country when it comes to global crypto adoption, as per market research firm Chainalysis. India’s market grew 641% over the past year and Pakistan’s 711%, showed data analysed by Chainalysis, using a metric that estimates the total cryptocurrency received by a country.
“Large institutional-sized transfers above $10 million worth of cryptocurrency represent 42% of transactions sent from India-based addresses, versus 28% for Pakistan and 29% for Vietnam,” the report said. “Those numbers suggest that India’s cryptocurrency investors are part of larger, more sophisticated organizations.” India now has two crypto unicorns and over 350 crypto startups.
How are they being offered as ESOPs in India and how will it be taxed?
Many cryptocurrency exchanges have launched their own tokens and are offering them to their employees as part of their annual compensation, similar to an employee stock ownership plan (ESOP). It also gets linked to employee performance in some circumstances. Apart from exchanges, issuing tokens as incentives to employees is gaining popularity among startups too. However, according to tax experts cryptocurrency or coins given to employees should be taxed on their actual market price in the year the employee received them. Income tax will only be triggered in the year when the employee actually gets the money.
“There are several smart contract standards on Ethereum that have been designed specifically to facilitate transactions in private company shares. One of the biggest advantages of ESOPs through crypto tokens is allowing private companies to restrict the further sale of stock options to a specific whitelist of approved parties. From a tax perspective, offering ESOP through crypto is fraught with risk as it enters unchartered territory in income tax law. The FY20 budget amendment for a more attractive deferred tax payment structure* for ESOPs of eligible startups is very likely not going to extend to crypto tokens in the eyes of the taxman. The interpretation of the taxman will be that these tokens are nothing but salary and should be taxed in the year of receipt at its market value so startups should be prepared for this eventuality unless the Government specifically includes cryptocurrency in the definition of “specified security” as per the Securities Contract Act,” said Harsha Bhuta, lawyer and partner at Bhuta Shah & Co LLP.
Since, cryptocurrencies are still operating in the gray area, how does a crypto index help investors?
On January 1, CryptoWire, the global crypto super app launched India’s first index of cryptocurrencies — IC15. The IC15 is a rule-based broad market index by market capitalization, which tracks and measures the performance of Top 15 widely traded liquid cryptocurrencies listed on leading crypto exchanges of the world. As of January 16, the index was down by 2,039 points (-3.03%) at 65,292.45 points. Bitcoin (BTC) slid Friday, wiping out previous day’s gains, though staying within the past few weeks’ trading range of roughly $40,000 to $44,000. Other major alternative cryptocurrencies too declined on fears that the Federal Reserve will move within the next few months to start raising interest rates for the first time since 2018.
Similar to Sensex and Nifty for equities, a Crypto Index is designed to serve as a benchmark for the performance of a selection of cryptocurrencies that are listed on recognized, open exchanges while meeting liquidity and market capitalization criteria. It allows building subsequent ETF products which allow investors to invest in a group of cryptocurrencies and avoid the risk of holding a single digital currency.
“The cryptocurrency industry also offers a range of thematic investing where baskets of cryptos can be generated based on a theme. For instance there are products like Coinzak where you can invest into theme-based coin baskets, which are nothing but portfolios of cryptocurrencies or tokens aligned intelligently to track a particular theme such as NFT or Defi… An index captures most of the transaction movement, which will aid investors to make information-driven decisions and would act as a base tool for crypto enthusiasts,” said Gaurav Dahake, CEO & Founder, Bitbns.
How will crypto ETFs be taxed?
“From a tax perspective, the sale of crypto ETFs tokens will have similar tax implications on the transfer of any cryptocurrency. As currently there is no provision under the Income Tax Act that provides for the transfer of cryptocurrencies, the most likely tax position is that such income should be taxed as capital gains unless a seller is a trader by occupation, which they should be taxed as business income. Although a position can be taken by the revenue authorities that such trading is treated as speculation income which would lead to a huge deterrent in investing in cryptocurrencies. The upcoming Budget may offer more clarity on this burning issue,” said Bhuta.
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