The Taxation of Income from Cryptocurrencies in Various Jurisdictions (Part 5): India
By Ashishkumar Bairagra, M L Bhuwania and Co LLP
Just like many other countries around the world, India has not introduced specific tax regulations for levying taxes on income from cryptocurrencies. This situation has left taxpayers with the option to decide the nature of income, based on their perception, and offer the income for tax accordingly. Under the (Indian) Income Tax Act, 1961, incomes fall under multiple categories and are taxed based on them, thereby also allowing for deductions or exemptions available for such divisions.
In this article, we will explore all the possible categories under which income from cryptocurrencies can be taxed in India (i.e. as business income, as capital gains, or as income from other sources).
Before we jump into the taxability of cryptocurrencies, it is pertinent to discuss the highly optimistic view (and the highly litigation-prone view) of whether income from cryptocurrencies is at all taxable. In India, many believe that because there are no provisions on cryptocurrency taxation, all gains from cryptocurrencies are non-taxable. This belief results from the opinion that cryptocurrencies are “forms of currency” rather than investments, capital assets, or stock-in-trade and, therefore, are not taxable. This view was thwarted by the Indian tax authorities when they sent out approximately 100,000 notices in February 2018 to known exchanges, traders, and holders asking about details of their transactions in cryptocurrencies, the source of payments, holding accounts, etc. One must also note that “income from other sources” is a residuary category under the Income Tax Act, 1961, and any (rather all) type of income which doesn’t classify under any other division has to be offered under this residuary category.
Consequently, we can, with reasonable clarity, agree that Indian tax authorities will argue that one has to pay tax on the income from cryptocurrencies.
Income from Business
Under this head of income, the income from the sale of cryptocurrencies is just like any other normal business activity, and the expenses incurred for earning the income are allowed as an expense, thereby profits are taxed. For miners, this would result in an expense deduction of all legitimate business expenditures incurred to generate cryptocurrencies. Miners will have to determine the cost price of every unit of cryptocurrency generated and also account for opening and closing stock. For holders, this would result in an expense deduction of the purchase price and other direct or related expenses, if any. Holders too will have to account for the opening and closing stock of cryptocurrencies, which is easier to determine than in the case of miners. Indirect expenses that are not for business purposes will not be allowed as an expense deduction, and the standard litigation about such indirect expenses will have to keep in mind, e.g. travel expenses, business promotion expenses, motor car expenses, etc. Income from business is taxed at a rate of 25% or 30% based on the type of assessee.
There is a legal concern with respect to treating the income as business income. In April 2018, the Reserve Bank of India (RBI), asked all entities regulated by them, “not to deal with or provide any services to any individual or business entities dealing with or settling Virtual Currencies. Regulated entities which already provide such services shall exit the relationship within a specified time (three months).” Under the head business income, only legal and valid business expenses are allowed as a deduction. It is possible that expenses after the date of this RBI notification may not be considered as an expense deduction, thereby risking the entire sale consideration to be treated as business profits liable to tax.
Income from Capital Gains
Under this head of income, the income from the sale of cryptocurrencies is considered an investment income, and hence the sale consideration is offered for tax, and the costs of acquisition and improvement, if any, are allowed as a deduction. In India, capital gains can be classified as “short-term” or “long-term”, depending on the period of holding the investment, and the threshold for determination is three years. For miners, they would need to establish the acquisition cost for every unit, and this would create a problem, as it is not clear if the expenses for mining cryptocurrencies qualify as a cost of acquisition, and if yes, to what extent. Therefore, for miners, the entire sale consideration could be treated as capital gains. The start date to determine the period of holding for a miner is also uncertain (i.e. from the date you start mining, or the date when the cryptocurrency is generated). For holders, it is relatively easy to determine the capital gains and the holding period, as the date and cost of acquisition are known. It is also important to note that in India, the cost of acquisition can be adjusted for inflation, based on the period of holding, thereby giving the benefit of reducing the capital gains to make it inflation-adjusted. Income from capital gains is taxed at 10% for inflation nonadjusted long-term capital gains, 20% for inflation-adjusted long-term capital gains, and 30% for short-term gains.
Another issue in classifying the income as capital gains is to determine whether the asset (cryptocurrency) is “held in India” or “held outside India” because the manner of calculating capital gains for these two types of assets is different. The calculation for assets “held outside India” allows the capital gains (i.e. the difference in the cost of acquisition and the sale consideration), to be measured in foreign currency and translate only the calculated capital gain into Indian Rupees. This situation can be clarified with the example in the table below.
Income from Other Sources
Under this head of income, the income from the sale of cryptocurrencies is considered a casual source of income and only the expenses incurred directly and exclusively for the purposes of earning the income are allowed as an expense deduction. As explained earlier, since this is a residuary head of income, there is no issue or debate about classification, the period of holding, or cost of acquisition. Hence, this is a simple manner of offering the income from cryptocurrencies for tax. For miners, the sale consideration and all direct costs can be determined (subject to what is considered to be a direct cost), and the differential amount can be taxed. For holders, the earned profit can be offered as income from other sources. The tax for income from other sources is 30%.
One may ask why the taxability of “traders” has not been discussed in this article. The most logical explanation is that a trader who exchanges one cryptocurrency for another is only moving from one asset/investment to another, at a value that is (in “debatable” theory) equivalent to the price of the first cryptocurrency. Therefore, a trader does not make any profit/gain until he sells his cryptocurrencies for a fiat currency. It is only then that one can determine the income a trader has earned from cryptocurrencies. This view too is highly debatable but worth taking!
Ashishkumar BairagraM L Bhuwania and Co LLP, Mumbai, India
T: +91 22 6117 49 49
M L Bhuwania and Co LLP is an organisation dedicated to offering professional services by employing the industry’s brightest minds. Their services range from collaborative audit, consulting, and financial advisory to risk management and tax services. The firm’s diversified client profile across industries has helped improve its ability to advise clients on the dynamic and challenging environments in which they do business.
Ashishkumar has been in practice and a Partner of the firm since 2001. He handles International Taxation matters, Internal Audits, Management Audits and Consulting assignments. His areas of expertise include International Taxation, Transfer Pricing, Valuation, Due Diligence, PE and VC Funding, Cross Border Business Structuring and Business Consulting.
Published: Spring 2019