Taxation of Cryptocurrency in India: Rulings and Future Implications

Kiran Malik

31 Mar, 2023

Cryptocurrency has emerged as a popular digital asset that has gained widespread acceptance globally over the past decade. It is a form of decentralized digital currency that operates independently of any central authority, making it highly secure and transparent. However, with the increasing adoption of cryptocurrency, there arises a need to regulate and tax it like any other asset class. This has led to a growing debate on the taxation of cryptocurrency in India.

In this blog, we will delve into the current taxation policies for cryptocurrency in India, recent rulings, and the future implications of cryptocurrency taxation in the country. We will also provide a brief history of cryptocurrency taxation in India and discuss why it is essential to regulate and tax this new asset class.

Current Taxation of Cryptocurrency in India

The Income Tax Act, 1961^[1] does not specifically define or recognize cryptocurrency as a legal tender or currency. However, the tax authorities have been treating cryptocurrency as an asset class for the purpose of taxation. Here are the current tax implications of cryptocurrency in India:

• Treatment of cryptocurrency under Income Tax Act, 1961: Cryptocurrency is classified as a capital asset under the Income Tax Act, and any gains arising from the sale or exchange of cryptocurrency are taxed as capital gains. The tax liability on cryptocurrency depends on whether it is classified as a long-term or short-term capital asset, based on the holding period.
• Tax implications for cryptocurrency investors and traders: Without making a distinction between short-term and long-term gains, the flat income tax rate is applied to traders, retail investors, and anyone else who transfers cryptocurrencies during a fiscal year. Profits from the sale of virtual goods will be subject to a 30% tax. Regardless of the type of income, such as whether it is business or investment income, and regardless of the holding period, the 30% cryptocurrency tax rate will be in effect.
• Cryptocurrency mining and its tax implications: Cryptocurrency mining is treated as a business activity, and the profits from mining cryptocurrency are taxed as business income. The expenses incurred in mining cryptocurrency can be claimed as deductions against the income earned.
• GST on cryptocurrency transactions: The Goods and Services Tax (GST) is applicable to cryptocurrency transactions in India. The GST rate applicable to cryptocurrency transactions is 18%, which is charged on the commission or fees charged by cryptocurrency exchanges.

It is important to note that the tax authorities in India have been actively monitoring cryptocurrency transactions to ensure compliance with tax laws. Non-compliance with tax laws can result in severe penalties, including fines and imprisonment.

Rulings on Cryptocurrency Taxation in India

In recent years, there have been several significant rulings by Indian authorities on the taxation of cryptocurrency. Here are the recent rulings and their impact on cryptocurrency taxation:

• Supreme Court ruling on RBI’s ban on cryptocurrency trading: In 2018, the Reserve Bank of India (RBI) banned banks and financial institutions from dealing with cryptocurrency exchanges. However, the Supreme Court of India overturned the ban in March 2020, citing that the RBI had not provided enough evidence to support its decision. This ruling allowed cryptocurrency trading to continue in India and provided a boost to the cryptocurrency industry in the country.
• Circular issued by Central Board of Direct Taxes (CBDT): In May 2021, the CBDT issued a circular stating that gains from cryptocurrency transactions would be subject to tax and required individuals to disclose their cryptocurrency holdings in their tax returns. The circular also stated that failure to disclose cryptocurrency holdings could result in penalties and prosecution.

Impact of these rulings on cryptocurrency taxation

The Supreme Court ruling on the RBI ban provided a much-needed boost to the cryptocurrency industry in India. It also signaled that Indian courts were willing to support the development of the cryptocurrency industry in the country. The CBDT circular has also had a significant impact on cryptocurrency taxation by clarifying the tax implications of cryptocurrency transactions and mandating the disclosure of cryptocurrency holdings in tax returns. These rulings have increased transparency in the cryptocurrency industry in India and ensured that individuals are compliant with tax laws.

Future Implications of Cryptocurrency Taxation in India

The taxation of cryptocurrency in India is still a developing area, and there are several future implications to consider. Here are some of the future implications of cryptocurrency taxation in India:

• Indian government’s stance on cryptocurrency: The Indian government has taken a cautious approach to cryptocurrency and has been working on developing a regulatory framework for the industry. While the government has not yet recognized cryptocurrency as legal tender, it has indicated that it is open to exploring the potential benefits of blockchain technology.
• Possibility of a new regulatory framework for cryptocurrency: The Indian government has been working on a new regulatory framework for the cryptocurrency industry in the country. The government has proposed the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which aims to create a legal framework for cryptocurrencies while also introducing an official digital currency issued by the Reserve Bank of India.
• Potential impact of global cryptocurrency regulation on India: As the cryptocurrency industry becomes more global, there is a possibility that global regulations could impact the regulation of cryptocurrencies in India. For example, if global regulators impose stricter regulations on cryptocurrencies, it could influence India’s regulatory approach to the industry.

Overall, the future implications of cryptocurrency taxation in India are still uncertain. While the government has indicated a willingness to develop a regulatory framework for the industry, the exact shape of this framework is still unclear. However, with the growth of the cryptocurrency industry in India, it is likely that the government will continue to take steps to ensure that the industry is properly regulated and taxed.

Conclusion

Cryptocurrency taxation in India is still in its early stages, and the recent rulings by the Supreme Court and the CBDT have provided some clarity on the subject. The Indian government is exploring the potential benefits of blockchain technology and working towards developing a regulatory framework for the cryptocurrency industry. However, there is a need for further regulatory clarity and transparency in the area of GST on cryptocurrency transactions. The growth of the cryptocurrency industry in India offers immense potential, and it is important that the government continues to monitor and regulate the industry to ensure it remains compliant with tax laws and contributes to the economy’s growth.

Also Read:
Cryptocurrencies: Opportunity & Challenges in India
All about The new Cryptocurrency Bill 2021 (The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021)