Scope of this Article:

This article encompasses the basic understanding on Virtual Digital Assets (or” Cryptos”) mechanism in India, discussing therein all the ambiguities that may arise in near future for crypto investors.

Brief Introduction:

Cryptocurrency is a digital currency which is created and managed through use of cryptography as encryption technique. The cryptocurrency which has captured most of the attention is Cryptos. Cryptos was launched in the year 2009 by a group whose pseudo name was ‘Satoshi Nakamoto’. In recent times, Cryptos has created a huge hype in the global as well as Indian financial markets. Till now, none of the cryptocurrency has been recognized as legal medium of payment, i.e. Currency/Fiat Money. Some Cryptocurrencies available in market – Cryptos, Ethereum, Binance Coin, Tether, etc.

Summary of Current Legal Status (as on March’ 2022) of Cryptocurrency in India:

• The RBI has neither declared the cryptocurrencies as illegal nor accepted those as legal tenders, though it is proposed to introduce Center’s own CGDC (Central Government Digital Currency) by next year.
• In the inclusive definition of the expression “currency” under the Foreign Exchange Management Act (FEMA), a cryptocurrency has not been termed as such and the RBI has not recognized it as a legal tender.
• On the other hand, the Securities Exchange Board of India (SEBI) has not accepted it as an instrument, as it is issued by a ‘Server” and not by any person. Though GOI most probably may propose SEBI as a watchdog for Stock Exchanges when dealing with Cryptos.
• Notwithstanding above, various private entities accept Cryptos and similar cryptocurrencies as a mode of payment. It is recognized as a form of currency by them. In the absence of any regulatory framework in this regard, the trading and transactions are unaccountable and various issues relating to taxation thereof need specific detailed considerations by CBDT in future times.

Generation of Cryptocurrency:

The next big question as to from where the cryptocurrency can be generated is answered as below;

(1)  Mining:

• Mining is an activity where an individual (called the “miner”) uses his computer process to crack complex mathematical equations/puzzles. It is the process of creating new coins by solving math problems using a computer.
• By design, there is a finite number of Cryptos that can be generated, meaning only a limited capacity is available to extract.
• In addition to solving problems, miners are also required to update the cryptocurrency ledger called ‘Blockchain’. A ‘digital accounting ledger’ that can’t be tampered with, Blockchain is essentially a chain of blocks that contains the transaction history of Cryptos happening all around the world. Miners are paid a predetermined amount of Cryptos for their hard work and resources in solving the mathematical problems as mining involves tons of energy consumption and computing power.
• As a reward for this, the miner gets new Cryptos which is nothing but creation of a Cryptos or mining.
• Keeping all this in mind, to start mining Bitcoin, the following are the requirements for a mining infrastructure:

1. Powerful hardware CPUs, Servers, etc.
2. Software – A dedicated mining software – Eg. Kryptex, Kudo Miner, Minergate, etc.
3. Bitcoin Wallet – The Bitcoin earned from mining has to go somewhere associated with you. This is why you need a Bitcoin wallet that saves all earnings and data of cryptocurrency.
4. Mining pool – Mining is definitely not an individual’s task anymore due to its complex calculations. There are mining pools that allow miners to combine their resources and solve the equations together as a team.

(2)  Purchasing them from an OTC Cryptos Exchange against real currency:

Everyone cannot be a Cryptos miner. Hence, you can consider buying Cryptos from Cryptos exchanges and store them in an online Cryptos wallet in digital form. Unocorn, Bitxoxo, Zebpay, Coinbase etc., are some of the Cryptos exchanges presently in India. Such Cryptos would be purchased in consideration for real currency.

Eg: Unocoin is a very popular crypto exchange in the country because it is one of the oldest cryptocurrency exchanges. It was the first entrant in the Bitcoin space in India; they started at Tumkur, Karnataka, and later shifted operations to Bengaluru. It was established in 2013, at a time, when crypto was not a very common investment option, and only investors with high- risk appetites could only step up for it. The exchange has around 1.47 million registered investors. Via Unocoin you can fix a particular date and time, to sell a certain amount of crypto. Unocoin has over-the-counter (OTC) trade to enable users to trade in bulk. The exchange has also launched a mobile app to be more user-friendly.

(3)  Peer to Peer (P2P) Cryptocurrency Exchange:

Peer to Peer exchanges is governed and handled by a software. These exchanges allow the participants to directly participate in exchanges without involvement of any trusted third party to practice all trades.

Flexible Payment Options: In a peer-to-peer crypto exchange, you can use any form of payment that the seller accepts. That means you can buy Bitcoin with digital payments, gift cards, or even checks. When it comes to peer-to-peer payment options, there are no limits at all. In many cases, traditional platforms only permit credit and debit cards.

Regular OTC cryptocurrency exchanges are companies which serve as a medium between their customers and avail a profit by collecting fees. Contrarily, the communication between counterparties on peer-to-peer exchanges are regulated solely by pre-programmed software, with no demand of human intervention.

(4)  The core innovation of cryptocurrency/Bitcoin is a technology called the Blockchain:

Blockchain is a Peer-to-peer network of computers & servers which are together taking certain decisions without having any single or multiple trusted computers to take a decision. In other words, there is no one to decide if the certain thing is right or wrong, everyone in the network decides this together using something called consensus algorithms. Reaching to a consensus without having any boss, leader or superior together is the core component of the Blockchain.

In the simplest terms, the Blockchain is just a ledger that lists all the units of the cryptocurrency and who owns them. As money changes hands, the ledger is rewritten to reflect the transaction. This way it does not matter where the money is physically located as long as there is a single unit of all the units in existence, and who owns how much. If you tried to replicate digital coins you would soon be found out when you went to spend them, as they wouldn’t be accounted for in the Blockchain.

The Blockchain means that Cryptos never actually need to exist. No one actually “send” the coin anywhere. They just update the Blockchain to reflect who owns what. The currency is basically one giant list of IOUs (tokens issued on a blockchain). Any attempts to tamper with the currency can be easily detected by checking the Blockchain. It is an indigenously elegant solution to a problem that many people thought would never be solved.

How to set up a “E-Wallet” to start trading in Cryptos:

• Setting up a cryptocurrency or Bitcoin wallet is pretty a straightforward process that involves setting up your account along with verification. The earnings through mining can be withdrawn to your wallet, within 24 hours in most mining software. One can choose a Bitcoin wallet among the following popular ones like Zebpay, CoinDCX, WazirX, Coinbase, etc.

• Just download either of these on your Android or iOS device, create an account, and enable 2-factor authorization (2FA) for maximum security. Later, the wallet can be linked to your bank account to withdrawing the funds from your crypto wallet.

After setting up the brief overview in layman’s terms it would be appropriate to now run our minds left right and center on various different scenarios that may occur in the minds of the Indian investors in cryptocurrencies from the perspective of Taxation.

Income Tax Queries in India:

Everyone as of now must be aware of the recent budget amendments introduced by the Finance Act, 2022, hence the same are not repeated herein for the sake of brevity. In moving a step forward, it would be pertinent to analyze the various queries that may revolve around the crypto taxation. The same are encompassed as below;

1.     How will taxation on cryptocurrencies work?

FM Sitharaman has cleared that 30 per cent tax will be levied on income from cryptocurrencies. For example, if you make Rs 100 by selling your Bitcoins, you will have to pay Rs 30 to the government as crypto tax. By imposing 30 per cent tax on cryptocurrencies, the government wants to discourage crypto investments.

2.     Will I have to pay tax on my entire crypto investment?

No. You will only have to pay tax only on your income or profit from cryptocurrencies. For example, if you have purchased cryptocurrencies worth Rs 5,000 and sell then for Rs 5,500, only Rs 500 will be taxed at 30 per cent and not the entire investment.

3.     What does set off against long term loss means?

The current income tax laws allow taxpayers to set off their long-term losses against long term capital gains. It exempts taxpayers from paying tax on their long-term gains. However, that won’t be possible in case of crypto income. It will be treated as a separate class of asset.

4.    If I gift someone a Bitcoin, will I be taxed?

No. Only that person receiving cryptocurrency will be taxed. So, if you are gifting 1 Bitcoin to your friend, he will have to pay tax on that transaction. There is still no clarity whether it applies to inherited crypto or not. Further, gifting of cryptos to ‘Relative’ it will be exempt to tax up to the value of Rs. 50,000/-.

5.  Which transactions will be subject to 1 per cent TDS i.e. transaction taking place through Over the Counter (OTC) Stock Exchanges in India?

All crypto transactions that take place will be subject to a 1 percent tax deductible at source. A new Section 194S has been inserted in the Income tax act to make such transactions come into the system of reporting. A rate of 1% has been proposed as a rate of withholding. Such provisions have been proposed to be applied from 1st July, 2022 and where such provisions shall apply no other provision of withholding tax shall be applicable.

6.  What is the intrinsic value of cryptocurrencies? They work purely on demand and supply. Given its volatility, isn’t it an extremely unsafe class of financial assets, and open to manipulation?

Cryptocurrencies have an inherent utility as a technology. People also buy them to use them as a monetary asset, and demand and supply determine their value. Now this is similar to buying land – you can buy land to use it (build a house etc) or invest in it. Likewise, people invest in cryptocurrencies. These investments are used by cryptocurrency developers to fund further development of their projects. Given the tremendous potential of this technology, investments here will reap high returns. Taking a note of this companies such as Tesla are investing their treasury reserves in to bitcoin.

Interestingly, cryptocurrencies have delivered the highest returns on investments in a ten- year period than any other asset class in a lifetime. This is also to say that a critical mass of investors believes in the potential of the underlying technology.

Yes, cryptocurrencies can be volatile and open to speculative trades. There have been reports of frauds and market   manipulation.   However, such activity can   be regulated through licensed intermediaries. For instance, certain countries only allow sophisticated investors (having a threshold net worth) to invest in cryptocurrencies.

7.  Withholding taxes in case of transactions involving cryptos between Non-Residents and Residents in India.

In case of transactions between Non-Resident Persons, income arising from transfer of a cryptocurrency, whether of a capital nature or a revenue nature, is not taxable in India, even if the ‘operating Server’ is located in India. But when a non-resident person enters a transaction with a person resident in India, such transactions would be taxable, and the Indian counterpart would have to comply with the requirements of “Deduction of tax at source” under section 195 of the Act.

8.   Crypto Income Taxable under which Heads of Income.

If a person frequently deals in cryptocurrency as stock-in-trade, the gains therefrom would be taxable as “profits and gains of his business”. If he imports and/or exports goods, the fluctuations in the prices of cryptocurrencies would form part of the considerations paid and/or received for import or export of the goods, as the case may be. It is not known whether the liabilities for acquisition of any asset are incurred in cryptocurrencies and/or any borrowings are made payable in cryptocurrencies. If so, the transactions would attract the provisions of Section 43A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”).

The definition of “capital asset” given in section 2(14) of the Act is wide enough to include ‘property’ of any kind held by an assessee, whether or not connected with his business or profession. Although the word “property” has not been defined, yet it signifies every possible interest which a person can acquire, hold or enjoy. Therefore, a cryptocurrency, being an intangible asset, can be deemed as a ‘capital asset’ and is liable to be taxed as such, depending upon the intention of the person to hold it as an investment or otherwise. On the basis of the prescribed period of holding, the gain would be determined as short- term or long-term. If a cryptocurrency is held for a period exceeding 36 months from the date of purchase, it will be considered as long-term capital gain and taxed @ 20% with the benefit of indexation. If it is held for a period of less than 36 months from the date of purchase, it will be considered as short-term capital gain and taxed as per the slab rates applicable to the taxpayer.

9.     Cryptos generated through ‘Crypto Mining’, then will it fall under the ambit of Sec 45 of the Act.

One of the methods for acquiring Cryptos and/or cryptocurrencies is ‘mining’. A cryptocurrency acquired by this process amounts to a “self-generated asset”, which has no cost of acquisition. While as the trading in such a self-generated asset would be taxable as business income, no capital gains tax can be levied on transfer of such an asset

in view of the judgment of the Hon’ble Supreme Court in the case of B.C. Srinivasa Setty [1981] 5 Taxman 1 (SC)] wherein it was held that if cost of acquisition of an asset cannot be ascertained, the machinery provision for computation of capital gains will fail, therefore, no capital gains can be levied on transfer of such assets. Thus, cryptocurrencies generated in the ‘mining’ process may be exempted from tax.

10. Will transfer of cryptos from one E-Wallet to another E-Wallet of the same person be liable to Sec 194S?

No. On plain reading of Sec 194 S, the above transfer would not attract TDS liability.

11. Taxation aspects in case of ‘Peer to Peer (P2P) Cryptocurrency Exchange’ and Crypto Swaps.

A lot of small investors seem to think that tax can be avoided by doing peer-to-peer or P2P transactions and going through decentralized exchanges where tracking of transactions will be very difficult or impossible for the government. Investors also say they need more clarity from the government on two major issues: how will crypto swaps be taxed and how do you deal with taxes on transactions taking place on international exchanges. In this regard CBDT will very soon issue its guidance circulars in timely manners to remove any nuances in future.

12. Whether “Reward Points and other in-app purchases offered by social media companies, dating and gaming apps” are covered under Sec 194S?

The newly introduced law aimed at taxing cryptocurrencies is all set to impact reward points and other in-app purchases offered by social media companies, dating and gaming apps. Going ahead, social media giants or even gaming apps could face a 1% tax deducted at source as these would be covered under the government’s broad definition of virtual digital assets.

Cryptocurrency Taxable under GST or Not:

We understand that the Crypto currency is digital asset maintained in computer-based ledger which secures transaction, control the creation of additional coins and also verify the transfer of coin ownership. It is pertinent to mention that such currency is not maintained by Central Government or Authorized group.

Further, Cryptocurrency has existed in the market for more than two decades now. However, people at large do not have a clear picture of what cryptocurrency is. In such circumstance, the dilemma is whether the said currency is taxable to Goods and Services Tax (hereinafter referred as GST) under Indian bylaws.

The GST is leviable on all supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, petroleum products, aviation turbine fuel, natural gas, electricity etc. While the term goods and services are defined as under:

• Goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of
• Services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is.

Is Crypto Currency ‘Money’?

Further, the term money has also been discussed in GST Law as:

Money means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order, postal or electronic remittance or any other instrument recognized by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.

In view of above interpretation, it can be said that since crypto currency is a decentralized currency the same is not recognized by Reserve Bank of India, it may not be treated as money and should be covered under definition of goods or services.

Consequently, the said transaction is leviable to GST. The subsequent question is whether the same should be classifiable as goods or services. We understand, cryptocurrency is an intangible asset. Although, till date there is no clarity on GST on cryptocurrency by Government whether same is classifiable as goods or services. Thus, an analysis is made based on similar intangible assets.

Cryptocurrency `mining’ will be treated as a supply of service since it generates cryptocurrency and involves rewards and transaction fees. Tax will be collected from the miner on transaction fees or reward. If the value of the reward exceeds INR 20 lakh, individual miners will need to register themselves under the Goods and Services Tax (GST).

Buying and selling of crypto currencies will be considered under the category of supply of goods.

Other related facilitating transactions will be counted under services and these would include supply, transfer, storage, accounting, among others.

The transaction value in rupees or the equivalent of any freely convertible foreign currency will be used to determine the value of cryptocurrency.

In scenario where both buyer and seller are in India, a transaction would be treated, as a supply of software and the buyer’s location will be the place of supply. For transfer and sale, the location of the registered person will be the place of supply. However, in a scenario where sale has to be made to non-registered persons, the location of the supplier would be considered as the place of supply.

Integrated GST would be applicable for transactions conducted beyond the Indian territory and would be considered as import or export of goods. IGST will be levied on cross-border supplies. Also, the commission on the fees charged by the crypto currency exchanges is likely to be taxed at 18% in the absence of any express clarification from the Government of India.

The author can be reached at advashishparashar@gmail.com