To understand the tax implications of Cryptocurrencies in India, the following points need to be understood under the context of the Income Tax Act:
1) Business Income - These are the profits and gains received from any business or profession carried on by the tax payer at any time during the Financial Year. It includes 'any' compensation received or other payment due to be received. Further, the compensation may be received in Cash or Kind.
2) Capital Gains - It means any income which has been derived from a 'Capital Asset' (whether movable or immovable)
3) Capital Asset - It means property of any kind held by the taxpayer, whether or not connected with his business or profession.
However, this does not include any Stock in Trade
Note: Since the cryptocurrencies have not yet been declared as legal tender by the Reserve Bank of India, these cannot be considered as legal tender (cash) and shall be considered as an asset. With a general understanding of the above terms, we move on to understand how cryptocurrencies would be taxed under different scenarios:
Scenario 1: When a person receives Cryptocurrency as payment for rendering goods or services
If a provider of goods or services receives any payment by cryptocurrency, then, the fair market value of the cryptocurrency received as consideration for rendering the goods or services will be considered as the consideration (that is the sale amount). Hence, the difference between the Fair Market Value of the cryptocurrency and the cost of provision of goods or services will be treated as Business Income in the hands of the taxpayer and the resultant Business Income will be charged to tax at the applicable slab rate. Let us take the following example to understand the above more clearly:
Mr. A provides services for which he agrees to receive 2 Bitcoins. For simplicity purpose, assume the cost of provision of service as Rs. 5,00,000/- and the Fair Market Value of 1 Bitcoin = Rs. 5,50,000/-. Hence, by applying simple mathematics we can conclude that the total consideration for the services rendered is Rs. 11,00,000/- (5,50,000*2) and therefore the Business Income is Rs. 6,00,000/- Continuation of Scenario 1: The person receiving cryptocurrency as consideration sells the cryptocurrency
Now as soon as the person receives the cryptocurrency as consideration, it becomes his capital asset under the assumption that it is not Stock in Trade (which is discussed later). Therefore, as and when the person sells the cryptocurrency, the resultant difference between the Fair Market Value on the date of receipt of cryptocurrency (from the provision of goods or services) and the date of sale of cryptocurrency will be treated as Capital Gain. Further, if the cryptocurrency is held for 36 months or less, it will be treated as Short Term Capital Gain. If it is held for more than 36 months it will be treated as Long Term Capital Gain. While computing Long Term Capital Gain, the taxpayer will get the benefit of indexation. The bifurcation of Short Term Capital Gain and Long-Term Capital Gain is important since the Short Term Capital Gains are taxed at Slab Rates and Long-Term Capital Gains are taxed @ 20%. Let us continue the example taken in Scenario 1:
Suppose the bitcoins received by Mr. A is sold by him @ Rs. 5,75,000/- per Bitcoin then the value of the consideration that will be received by Mr. A is Rs. 11,50,000/-. Hence, the Capital Gains would be Rs. 50,000/- (11,50,000 - 11,00,000) and depending on the period of holding of the cryptocurrency, it will be taxed as Short Term Capital Gain or Long Term Capital Gain
Scenario 2: A person paying consideration by cryptocurrency for receiving any goods or services
If a person availing any goods or currency pays consideration in the form of cryptocurrency, then in such a case there will be aspects which will need to be considered:
i) Capital Gains
ii) Amount (Quantification) of the expense
Capital Gains: The Capital Gains will be determined in the same manner as discussed in 'continuation of scenario 1' and will be taxed accordingly. However, in this case the relevant dates for determination of period of holding shall be the date of acquisition of the currency and the date of payment
Amount of expense: The amount of expense shall be the Fair Market Value of the cryptocurrency on the date of payment
Let us take the following example to understand the above clearly:
Mr. A avails goods worth Rs. 11,50,000/- the payment for which is discharged by paying 2 Bitcoins (5,75,000 * 2). Assuming the cost of acquisition of 2 Bitcoins to be Rs. 10,00,000/- (5,00,000 * 2), the resultant Capital Gain will be Rs. 1,50,000/- and will be taxed as Short Term Capital Gain for Long-Term Capital Gain depending on the period of holding. The amount of expenditure will be the Fair Market Value of the Bitcoins that is Rs. 11,50,000/-
Scenario 3: A person Investing / Trading in cryptocurrency
This is the simplest to understand. However, the important aspect to be to be considered is whether the activity is to be considered as Investment or Trading. If the activity is considered as Investment the difference between the sale price and purchase price will be treated as Capital Gains (the treatment will be as discussed earlier) and on the contrary if the activity is considered as Trading, the difference will be treated as Business Income irrespective of the period of holding.
Determining whether the difference will be considered as Capital Gains or Business Income will depend solely upon the intention of the person at the time of acquisition of the cryptocurrency.
Conclusion: The Indian Tax laws do not have a specific mention on how cryptocurrencies are to be taxed in India and remains a grey area, particularly as the exposure of people increases until a specific mention in the law is made. The cryptocurrencies are not declared as legal tender by the RBI and hence shall be treated as an asset. Further, it shall be kept in mind that the cryptocurrency market is an unregulated market however not an illegal one.
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