Planning to invest in a Bitcoin Exchange Traded Fund (ETF), approved by the US Securities and Exchange Commission (SEC)? It is better to wait for the government to come out with a clear policy with regard to taxation.

Indians, using the Liberalised Remittance Scheme (LRS) with a cap of $250,000, can invest in various approved securities abroad through a special overseas investment account. The latest approved security is a crypto-based ETF in the US. On January 10, the SEC approved the listing and trading of many spot bitcoin exchange-traded product (ETP) shares. Following this, according to reports, eleven spot bitcoin ETFs - including BlackRock’s iShares Bitcoin Trust, Grayscale Bitcoin Trust, and ARK 21Shares Bitcoin ETF, among others - began trading on January 11. News agency Reuters reported that on the first day alone, total volume touched $4.6 billion.

Though India has not banned bitcoins or cryptocurrencies in general, but to discourage people, the government has imposed heavy taxation on Virtual Digital Assets (VDAs). Any income from the transfer of a VDA is taxed at the rate of 30 per cent with no deduction for any expenditure (except the cost of acquisition) and no set-off of any loss is allowed while computing the transfer of such asset. The losses cannot be carried forward as well. Also, any person who is responsible for paying to any resident any sum by way of consideration for the transfer of a VDA is required to levy TDS at the rate of one per cent provided aggregate consideration payable is more than ₹10,000 in a year.

Under the Income Tax Act, VDA has been defined in a wide manner to, inter-alia, include any information, code, number or token not being Indian or foreign currency, and generated through cryptographic means or others. Now, there is no clarity on whether the bitcoin-based ETF, which derives value from underlying assets (here bitcoin or VDA), should be included in this definition. Another issue is whether this can be taken under exchange-traded products with different asset classes such as equity or debt for taxation purposes.

Experts offer varying advice on this. Rahul Charkha, Partner, Economic Laws Practice, said: “Bitcoin falls within the definition of virtual digital asset (VDA) under the IT Act and hence, any income from transfer of Bitcoin is taxable at the rate of 30 per cent. While Bitcoin ETF can be treated as a capital asset, it does not fall within the definition of VDA.”

Amit Maheshwari, Tax Partner with AKM Global, a tax and consulting firm said: “In case where an Indian resident taxpayer is selling Bitcoin ETF, there is no clarity on what would be the tax implications.” According to him, one could argue that in substance, ETFs only represent underlying cryptocurrencies and hence the taxation would be the same as that of a virtual digital asset (VDA).

Charkha opined that the transfer of bitcoin ETF would be chargeable to tax as capital gains leading to tax efficiency. “Transfer of Bitcoin is subject to one per cent TDS, unlike Bitcoin ETF which are listed on the overseas stock exchange would be subject to TCS (Tax Collected at Source) at the rate of 20 per cent,” he said.

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