Mohan Lavi

Taxing cryptos

Mohan R Lavi | Updated on March 09, 2018 Published on December 31, 2017

The currencies are booming; we need checks

While the RBI is adopting a wait-and-watch approach on crypto currencies in India, the Income Tax department seems to have a different opinion. It has issued notices to around 500,000 individuals who have had something to do with crypto currencies. The notice read: “ In case of gains, you have to state profits or capital gains made by you from transaction in cryptocurrencies year-wise with statements showing the workings. If you are holding bitcoins or other cryptocurrencies as on date, you have to furnish details of the same including the wallet’s public key in which they are kept.” The IT deparment also wants them to submit details of total purchase and sales of bitcoins and other cryptocurrencies from websites registered out of India. They also have to state whether they are buying or selling cryptocurrencies in cash by making peer-to-peer transfer.

The thinking of the IT Department seems to be that crypto currencies are capital assets and hence any profits made on their trading need to suffer either long-term or short -term capital gains tax. It appears that the few who have shown some income from crypto-currencies have classified them under ‘Income from Other Sources’ since the other heads of income under the Income Tax Act appeared inadequate.

Since crypto-currencies are not legally recognised as currency, their default classification would be as capital assets. Once classified as capital assets, the provisions regarding capital gains would come into play. However, since these currencies are mined, they would be self-generated capital assets, which would mean that no cost of acquisition could be assigned to them.

The decision of the Supreme Court in BC Srinivasa Setty that no capital gains can be levied on self-generated assets has stood the test of time — if this case is applied here, gains from crypto currencies could escape capital gains tax. However, it crypto currencies have been traded for any form of legal tender, they could still suffer from either long-term or short-term capital gains tax under the sale of assets norm.

Considering the brouhaha that the price of bitcoins in particular has created, it is possible that they can be taken in exchange for supply of goods or services. Taxation of such transactions would be a no-brainer — it would be included under the head profits and gains of business or profession.

Having studied the working of the exchanges that deal with crypto currencies and knowing some of the transactions that players in these exchanges have done, the IT Department is in an ideal position to bring out a detailed circular on taxation of crypto currencies. When they do, they should also talk about how any losses in trading in crypto currencies would be dealt with under tax laws as all discussions right now on the topic have only focused on the profits and gains.

On their part, the RBI should also come out with a detailed clarification on how they view crypto currencies. Considering the speed at which technology is advancing and fintech companies are innovating, crypto currencies may become history in a couple of years time. Both the regulators should not repent not issuing a clarification during the glorious years of crypto currencies.

The writer is a chartered accountant

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Published on December 31, 2017
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