Taxation of Bitcoins- Income Tax, GST, Tax Havens, Income Tax Return Disclosure and Country Wise Analysis of Tax Structure

If you are interested to understand the Taxation of Bitcoins, How to Compute Income Tax on Bitcoins, How to Disclose in ITR, Whether loss on Bitcoins is tax-deductible, whether GST is applicable on Trading Bitcoins, which countries are tax havens for bitcoins, Is trading bitcoins banned or illegal in India and how countries like USA, Canada, Germany, South Africa & Australia tax bitcoin then you’re at the right place.

Is Bitcoin Trading Banned in India

First thing first, No it is absolutely not banned in India. To understand better, read on.

RBI Issued Circular Dated 06th April 2018 to Ban Crypto Trading

The Reserve Bank of India had virtually banned cryptocurrency trading in India as in a circular RBI/2017-18/154 DBR.No.BP.BC.104 /08.13.102/2017-18 issued on April 6, 2018, it directed that all entities regulated by it shall not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling those.

“2. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/ sale of VCs.

3. Regulated entities which already provide such services shall exit the relationship within three months from the date of this circular.”

Supreme Court Reversed RBI Circular on 04th March 2020 on Ground of No Damage to Banking Atmosphere. Though RBI has the POWER!

The court accepted that some institutions accept virtual currencies as valid payments for the purchase of goods and services, and there is no escape from the conclusion that the users and traders of virtual currencies carry on an activity that falls squarely within the purview of the RBI.

No Ban on Trading VC’s since RBI Unable to Prove any Damage to any of its Regulated Entities

SC further stated that there is no doubt that RBI has very wide powers not only in view of the statutory scheme of the 3 enactments indicated earlier but also in view of the special place and role that it has in the economy of the country.

These powers can be exercised both in the form of preventive as well as curative measures, but the power to take pre-emptive action or the proportionality of such measure, RBI needs to show at least some hint of any damage suffered by its regulated entities. But there is none.

RBI Itself Admits that it had not banned Crypto

Further, The Reserve Bank of India has itself said it had not banned cryptocurrencies such as Bitcoin in India, but only ringfenced regulated entities like banks from risks associated with the trading of such virtual instruments.

The central bank said this in a response to a petition filed by the Internet and Mobile Association of India (IAMAI), which wanted it to reconsider 2018 circular directing regulated entities not to deal in cryptocurrencies.

Hence in nutshell, as on Date Trading of Bitcoins is Legal and permissible.

Is Bitcoins – Goods or Service and Liable to GST In India?

Before, I go on to discuss the provisions of GST on Bitcoin, note what Supreme court in the above ruling held in terms of nature of Bitcoins. SC stated that what an article of merchandise is capable of functioning as is different from how it is recognized in law to be. It is as much true that VCs are not recognized as legal tender, as it is true that they are capable of performing some or most of the functions of real currency. Therefore, VCs cannot be considered just goods or commodities.

Bitcoins are NOT Goods

Definition of Goods under GST

“Goods’’ from a GST perspective means every kind of movable property other than money and securities but includes actionable claims, 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 supply. Since money and securities are excluded, it is relevant to explore what they are with respect to this definition.

Money has been defined in section 2(75) of the GST act as Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, travellers cheque, money order, postal or electronic remittance or any other instrument recognized by the Reserve Bank of India when used as 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.

Since the RBI has not granted any regulatory approval to bitcoin it should be given that Bitcoin is not money for purposes of taxation under GST. But then, are bitcoin securities?

Securities have been defined as per the GST act as having the same meaning as assigned under sub-section h of section 2 of the Securities Contracts (Regulation) Act, 1956. Which defines securities as :

1) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate

2) derivative

3) units or any other instrument issued by any collective investment scheme to the investors in such schemes

4) Security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

5) units or any other such instrument issued to the investors under any mutual fund scheme

6) Government securities;

7) such other instruments as may be declared by the Central Government to be securities; and

8) rights or interest in securities

Those who are familiar with crypto currencies would agree that bitcoin or other tokens do not fall into the bracket of securities either.

Bitcoin Trading Do Fall under Broad Gates of Service Definition

Services have been defined under GST as 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 charged.

In our View, the Trading of Crypto’s do fall under definition of Service and shall be liable to GST. The bigger question though remains how valuation of such service shall be done. Whether the gains shall be made liable to GST or some other manner.

Government is Planning to Impose GST on Bitcoins

The CEIB, a part of the finance ministry, said bitcoins can be categorised under the “intangible assets” class and be treated as current assets, sources told The Times of India. The board proposed that GST can be levied on the margins made while trading in the cryptocurrency.

Income Tax on Bitcoins

There are several questions that arises including the nature of income whether business income or capital gains or other sources, how to disclose in ITR, how to compute taxes, how to claim losses etc. Let’s discuss.

Capital Gains or Business Income

It is a Million Dollar Question. Even countries like Canada with advanced legislature to tackle this issue have vacuum on this aspect.

In view of Section 2(14) of the Income-tax Act 1961, a capital asset means a property of any kind held by a person, whether or not connected with his business or profession. The term ‘property’, though has no statutory meaning, yet it signifies every possible interest which a person can acquire, hold or enjoy.

“Therefore, bitcoin could be deemed as capital assets if they are purchased for the purpose of investments by taxpayers. Any gain arising on transfer of a cryptocurrencies shall be taxable as capital gains. However, if the transactions are substantial and frequent, it could be held that the taxpayer is trading in cryptocurrencies. In this case, the income from sale of cryptocurrencies would be taxable as business income

In most common prudence the spirit of Circular 6/2016 dated 29.2.2016 should even apply in this case.

What Rate of Tax Shall Apply

The gains made from investing in bitcoins or virtual currencies are taxable as capital gains, and to calculate capital gains, one needs to first calculate the period of holding. If investors hold cryptocurrencies for 36 months or more, the gains would be taxable as long-term capital gains (LTCG), and less than 36 months, it would be short-term capital gains (STCG).

“Short-term capital gains are taxable as per the slab rates applicable to a taxpayer. And long-term capital gains are taxed at the flat rate of 20% with the benefit of indexation.

Whether Losses Incurred can be Claimed as deduction

If Treated as Capital Gains :- Long Term Capital Loss can be set off only against Long Term Capital Gains. Short Term Capital Losses are allowed to be set off against both Long Term Gains and Short Term Gains.

If treated as Business Loss :- But the losses from any other businesses or profession can be set off against profits from the specified businesses. Further Business loss other than speculative business can be set off against any head of income except income from salary.

Disclosure in Income Tax Return (ITR)

Depending upon Long Term Capital Gains or Short Term Capital Gains respective schedule information to be mentioned based on which ITR utility computes the taxes.

Further, Individuals having taxable income more than ₹50 lakh have to mandatorily fill in Schedule AL in ITR forms, which contains information related to investments in mutual funds and securities, including cryptocurrencies.

Which ITR Form is to be Filled

Keep in mind that for individuals who have capital gains or business income arising out of cryptocurrencies, ITR-2 and ITR-3 are the relevant forms for tax returns.

Tax Havens for Bitcoin Traders

Levying taxes on income and capital gains from Bitcoin and other cryptocurrencies is now common in most countries. However, there are several countries that are bucking the trend, keen to see how this emerging asset class develops and to encourage innovation.

Even in these countries, tax laws are subject to change and are often complex.

But while some countries are putting pressure on investors and levying taxes on income and capital gains from Bitcoin transactions, many are taking a different approach—often with the aim of promoting better adoption and innovation within the crypto industry. They’ve implemented friendlier legislation, and allow investors to buy, sell, or hold digital assets with no tax liability.

There are 10 Countries currently with no tax on Bitcoins. Offcourse, when you decide to trade within those countries, It is always better to read and understand laws in thoroughness and also take proper consultant’s opinion.

10 Countries

Belarus

Germany

Hong Kong

Malaysia

Malta

Portugal

Singapore

Slovenia

Switzerl

Bermuda

How about that!

Taxation on Bitcoin – USA, Canada, Germany, UK, South Africa & Australia

Now, let’s discuss the International View on Bitcoin. Most Developed Countries unlike India have already drafted their code of taxation to address the bitcoin matter. India will soon follow on one of laid ideology. That’s why we are discussing the mechanism of how these countries are addressing to taxation of Bitcoins.

Taxation on Bitcoins in USA

The US IRS (Internal Revenue Service) recently has clarified that For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

Concluding Remarks

So, Friends, I hope the above would have cleared a lot many of your queries. Still if you have any queries regarding Crypto or Bitcoin Taxation always share with us in the comment box below. We will definitely revert ! Thanks for reading.