Budget 2022: Govt should clarify taxability of cryptocurrencies

Globally interest in cryptocurrencies has only roared and so much so in India, with various platforms opening up opportunities to invest in these currencies and significant marketing spending in the promotion of these currencies as a safe medium for investment. 

The popularity can be easily gauged from a recent report issued by a renowned discovery platform providing that India has a staggering number of 100 million cryptocurrency owners, the largest investor base in the world.   

It has been a matter of debate whether to treat cryptocurrency as "tradeable currency" or an "asset". 

The Reserve Bank of India (RBI) had attempted to provide guidance through a circular that was struck down by the Supreme Court. For a cryptocurrency to be treated as a currency, it is necessary to have the state's recognition. To date, the government has not recognised cryptocurrency as an official currency. 

Also Read: India may soon see its first Bitcoin and Ethereum futures ETF

Tax incidence of cryptocurrency and relative ambiguities  

The existing provisions under the Indian tax laws have not specifically spelt out any provision for the taxation of cryptocurrency transactions.

It is only by the general understanding of the nature of transactions and interpretation of provisions under the tax laws along with various judicial precedents, tax professionals are drawing analogies in relation to its taxability.  

In the absence of specific provisions covering the taxation of cryptocurrencies, the taxation may have to be ascertained depending upon the intention of the person dealing in cryptocurrency transactions. 

Gains from the transfer of cryptocurrency is either classified as "business income" or "capital gains" and income from other sources in residual cases.  

If the intention is to derive gains from the appreciation in the value of an asset, then it shall be treated as capital gains, and in case of a person who frequently deals in cryptocurrencies, it may be classified as business income. 

There are also views that income from crypto transactions may be treated as speculative business income. However, due to lack of clarity from the government regarding the taxation of crypto transactions, it remains a vexed issue. 

Considering there is no specific treatment of cryptocurrency in the Indian tax laws, the transactions involving cryptocurrencies are shrouded in ambiguity with various issues emerging; some are reproduced below: -

Also Read: Union Budget 2022: Govt may mull TDS/TCS levy on cryptocurrency trading

Issues that need clarity -  

• Specific provisions clarifying the taxation of cryptocurrencies for both retail and institutional investors. 
• Whether payment for transactions can be undertaken through cryptocurrencies? If yes, whether specified persons or businesses be restricted from accepting cryptocurrency payments. 
• If a person pays for a good or service in cryptocurrency, whether payment will be considered as a mode of settlement or as sale of cryptocurrency to another person against consideration of goods or services. 
• Cryptocurrencies are mostly bought and sold in foreign currency. Accordingly increase or decrease in value of rupee will also result in fluctuation gain or loss. How are gain/loss arising from forex fluctuation to be treated? 
• If a person wants to offer income under a presumptive basis, it is necessary to understand whether transactions in cryptocurrency can be covered under the purview of prescribed modes for presumptive taxation. 

Expectations from Budget 2022 

As per the famous saying by American lawyer and jurist William Brennan Jr. 'Law cannot stand aside from the social changes around it', with a continuous change in mode and medium used for transacting business, it is important that law in India evolves with time and clearly spells out provisions relating to new mediums such as cryptocurrencies to clarify ambiguity and anxiousness of millions of users in India who have invested in cryptocurrencies.  

News reports have already suggested that the government is keen to regulate the transaction in cryptocurrencies through 'The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021'. 

While regulating cryptocurrencies will provide a legal framework, it is expected that the upcoming budget clarifies the taxability of cryptocurrencies and provide certainty and guidance to crypto investors prior to investing in such currencies. 

(This article has been contributed by Sridhar R, Partner, Grant Thornton Bharat LLP with inputs from CA Sudeep Das, CA Ashwath Pai and CA Abhinay Vankadaru.)