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There is no clarity on what cryptocurrencies actually are — a currency, an asset, a commodity or something totally different. Investors and traders will be able to get a clearer picture of taxation only when this matter is resolved by the government. Till then experts say there are two possible tax treatments. First, cryptocurrency could be deemed a capital asset if purchased for investment. However, if the transactions in cryptocurrency are substantial and frequent, it could be said that the taxpayer is trading in cryptocurrency, and the income would be taxable as business income.

Now the new question arises whether it is feasible to tax crypto as foreign assets. Former Reserve Bank of India (RBI) Deputy Governor R Gandhi while speaking at the first edition of the Crypto Asset Conference HODL 2021 held by the Internet and Mobile Association of India (IAMAI) and the Blockchain and Crypto Assets Council (BACC) said that “On entry in a citizen’s hand, crypto should be deemed as a foreign asset. Then, it should be paid through normal channels when it is bought, if not, it will be deemed as mined, and the capital gained and taxed heavily. Then if it is proved mined, capital is taxed slightly lightly. It should be fully tracked through a depository or repository of information. Then exchanges can facilitate trade– buy and sell–and settle payment and receipt.”

Experts said if gains arising from the transfer of crypto are treated as capital gains, their further classification into short-term or long-term gain would depend upon the period of holding. If crypto was held for more than 36 months from the date of purchase, it would be considered as a long-term capital asset, otherwise a short-term capital asset. The short-term capital gains are taxable as per the slab rates applicable to a personal taxpayer. Long-term capital gains are taxed at the flat rate of 20% with the benefit of indexation.

“If the Income Tax department clarifies this position that crypto shall become a foreign asset in that case, it shall be taxed as capital gains in the hands of the transferor. Then it can only be taxed in the hands of the person who is a tax resident of India,” said Tarun Kumar, chartered accountant and direct tax leader at Coherent Advisors.

The Non-resident Indian (NRI), Kumar said, shall not be liable to be taxed on this income if we consider it as a foreign asset. The income accruing or arising from the transfer of capital assets situated outside India would be considered as foreign income. The person who is a tax resident of India is liable to pay tax in India on his global income whereas if a person is NRI, then he shall be charged to tax only in respect of Indian income.

Taxability on Mining

Should it be taxed when the person has mined and not bought the cryptocurrency? “There may also be issues if the tax department takes this stand that crypto shall be considered a foreign asset. In that case, they shall not be able to tax crypto earned from the mining process. One of the methods for acquiring cryptocurrencies is ‘mining’. The crypto generated during the mining process shall be considered as self-generated capital assets and the cost of acquisition of such crypto shall not be determinable,” said Kumar.

He further explained, the Supreme Court of India in the landmark ruling in the case of Commissioner of Income-tax v. BC Srinivasa Setty [1981] 128 ITR 294 (SC), held that if the cost of acquisition of an asset cannot be ascertained, the machinery provision for computation of capital gains will fail. The mode of computation and deductions provide the principal basis for quantifying the income chargeable under the head ‘Capital gains’. The capital gains can be computed for an asset in the acquisition of which it is possible to envisage a cost.  None of the provisions of the head capital gains suggests that they include an asset in the acquisition of which no cost at all can be conceived. Therefore, no capital gains can be levied on the transfer of such assets. Considering this Supreme Court ruling, the crypto generated in the ‘mining’ process shall not be charged to tax.

Till the tax issues around cryptocurrencies are resolved, it is advisable to make the declaration in your ITR and pay tax accordingly on the gains earned.