Cryptocurrencies and their likely tax treatment in India

We all would have heard about virtual money and electronic fund transfers-digital payment methods used widely? Have we? Cryptocurrency which is running in today’s era-a virtual currency is not issued by the Central Government, is secured by cryptography and does not rely on banks to verify transactions.

What is Cryptocurrency?

Basically Cryptocurrency is a digital system which allows anyone anywhere to send and receive payments which are denominated in terms of virtual tokens. It is the easiest way of exchange because instead of carrying physical money the payments are purely digitised thus securing public’s wallets as these do not exist in physical form and are not issued by the Central Authority and the individual ownership records are stored in a ledger existing in a form of a computerised database to secure transactions.

The word Crypto refers to encryption algorithms and techniques that safeguard these online payments such as hashing functions, public private key pairs.

Where is India standing in terms of cryptocurrency?

• The Indian Government is looking towards regulating digital currencies that is the MCA (Ministry of Corporate Affairs) has made it compulsory for the companies to disclose crypto trading/investments during the financial year, the profit/loss involving cryptocurrencies, details of amount of holding, advances taken from any person for the purpose of investing in cryptocurrencies.
• Cryptocurrency is not illegal in nature. The government has constituted an Inter-Ministerial committee to analyse the functioning of virtual currencies
• The government may consider introduction of a bill on Cryptocurrency which will ban private cryptocurrencies in India and shall contain some exceptions to promote the trading of cryptocurrency
• It has been confirmed by the Union Minister Nirmala Sitharaman there shall not be a complete ban on cryptocurrency-people shall be given options to experiment block chains, bitcoins etc.
• With trading in full swing, gradually an official digital currency shall be issued by RBI

What is Bitcoin?

• Bitcoin is the first decentralised cryptocurrency released in 2009. Which was the first blockchain based cryptocurrency
• Bitcoin was launched by Satoshi Nakamoto-name being the pseudonym for the creators of Bitcoin who want to be anonymous
• It has decreased below 30000$ for the first time in 5 months since January 2021 because of which the market capitalisation of the most popular cryptocurrency declined
• From past week it is showing sale signals therefore making it bearish in the market
• Apart from this, there are other cryptocurrencies like Ethereum, Tether, Binance Coin, Cardano, THETA, etc.

Working of Bitcoin

• It acts like a computer file which is stored in a digital wallet which can be sent from one person to another.
• Every transaction is recorded in a list called block chain. These can be easily exchanged for products, services or other currencies.
• For spending the bitcoin, the owner must know the private key for signing the transaction which is never disclosed.
• Since there are multiple inputs and outputs in the transactions, users can send bitcoins to multiple recipients.
• Funds here are not tied to real world entities but addresses, owners are not completely known, but transactions take place in public.
• There are many brokers available who trade in Bitcoin where buying/selling of fractional shares is also possible.
• But bitcoin has been criticized for the electricity used by mining (which is a record keeping service done through use of computer processing power).

How to earn through Bitcoin?

• For investing in Bitcoin -there are a few ways to trade like
  • Day Trading: The day traders do not hold position overnight because this is a very short and quick trade
  • Swing Trading: The swing traders hold for a long term view, wait to see whether the price of their holdings increase then sell at high rates.
  • Arbitrage: It involves looking for opportunities across different platforms or exchanges.

• Bitcoins can be accepted as a payment option, once done it opens all doors to earn profit.
• There are micro earning sites which award bitcoins like by watching ads on them or by completing surveys.
• One of a fascinating way is to insert new blocks to the network of blockchain-also known as cloud mining

Is Cryptocurrency secured?

• Cryptocurrencies are formed using Block Chain technology in which transactions are recorded into blocks which is a quite complex process.
• The validity of cryptocurrency coins is given by blockchain.
• There are more than 2000 different types of cryptocurrencies and more are developed daily.
• Advanced level of coding is required in storing and transferring data between wallets and public ledgers.

Transactions require two-way authentication process wherein one may be asked to provide username and password to initiate a transaction wherein a code is generated sent through a text on mobile phone. Though fund transfer is quite simple between two parties, such transfers are encrypted by using public and private keys. Private key is for the user’s reference which is used for signing transactions. A digital cryptocurrency can be deleted in case of loss of a hard disk or if the private key is lost. But no Central Authority can access to the personal information of the user. In April 2018, Banks and other regulated entities were banned from supporting Crypto Transactions because of fraudulent activities taking place.

Is it safe to Invest in Cryptocurrencies?

• For investing one needs to learn about various cryptocurrency exchanges where people can buy or sell digital currencies because the market is risky, it’s better to research accordingly and then plan to invest.
• Since it is still an emerging asset and is not as admired like mutual funds, commodities or shares, so the prospective investors should be willing to take high risks to get high rewards from crypto trading.
• A lot of patience is required to get the funds invested for a longer period of time to get pretty good amount of returns. Also these have high liquidity making it easier to buy or sell at specified prices.
• No high fees is required to be paid to any bank or financial institution for transferring funds and that is why it is the most favourable instrument for trading with minimum cost.

How to Invest in Cryptocurrency?

• Firstly, a lot of research and study is required for investing in cryptocurrencies
• It’s Important to allocate a percentage of the investor’s funds
• Choose a platform-exchanges like Coin base, eToro, Gemini, Unifimoney, Binance can be easily accessed to trade, store, invest in Cryptocurrencies.

Is Income Tax Applicable on Cryptocurrencies?

Income derived from cryptocurrencies can be either shown under PGPB or Capital Gains. If these are purchased with the aim of investing-then the profit/loss on transfer shall be taxed under capital gains. If these cryptocurrencies are held for 36 months or more, Long Term Capital Gains will be attracted otherwise in case if these are held for less than 36 months, it would be Short Term Capital Gain.

If cryptocurrencies are held as Stock in Trade, then they would be taxed under the head Profits and Gains from Business or Profession and shall be considered as Business Activity.

Conclusion

Cryptocurrencies in today’s world is giving a boost to the digital network as these transactions are highly efficient making them secure enough to build the trusts of the investors and giving them complete ownership rights. Though the risks are high but still these are seen as a good option to consider while choosing from various investment options.