GST and the Taxation of Cryptocurrencies

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Published Date:  07-12-2023   Author:   moulik-jain
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Cryptocurrencies have revolutionized finance with blockchain-based decentralized digital assets. Cryptocurrency investment and transactions have soared. Over 1,500 virtual currencies exist, including Bitcoin and Ethereum.

GST Cryptocurrency taxation in India is controversial because they are virtual digital assets. Section 2(47A) of the Income Tax Act covers “any information, code, number, or token generated through cryptographic means,” including NFTs and other crypto assets. From July 1, 2022, transfers exceeding 50,000 will be subject to a 1% Tax Deducted at Source (TDS), and trading bitcoin earnings are taxed at 30%.

Users and businesses performing Bitcoin transactions must comply with crypto tax laws. Businesses will declare their gains and losses in GST virtual digital asset taxation currencies as the government regulates this terrain, a huge step toward transparency. Firms must disclose and pay taxes on bitcoin earnings, but individuals must, too.

What are Cryptocurrencies?

Like traditional currencies, cryptocurrencies are digital currency exchanges. Decentralization, eliminating banks, financial institutions, and central authority, made it problematic from the outset.

The 1,500+ digital currencies include Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic, and others. Bitcoin investments and exchanges have grown.  

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GST Definition of Cryptocurrency and Digital Assets

The GST Act does not define cryptocurrency or digital assets. Refer to this financial budget’s definition of virtual digital assets.

Virtual digital assets are any code or information that represents value exchanged and can be used in financial transactions. The resource can be kept or transferred electronically.

Virtual digital assets include non-fungible tokens and other central government-designated digital assets, but not Indian or international currencies.

Does it Fit within the GST and Exemptions’ Area of Supply?

Virtual digital assets must be commodities or services to be GST-covered.

GST commodities include moveable assets, actionable claims, crops, and anything attached to land that must be removed before sale. Goods exclude cash and securities.

Services include money usage and currency conversion for which a commission or interest is charged, even if they involve anything other than products, money, and securities.

Let’s define money and securities in the context of GST’s impact on the cryptocurrency market.

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  • Legal tender in India or abroad, cheques, letters of exchange, pay orders, electronic transfers, or any RBI-approved debt-satisfying instrument can be used to pay.
  • Securities are company-related instruments, including bonds, shares, and debentures. Derivatives, government securities, and investment program units are included.
  • Virtual digital assets are neither money nor securities; hence, GST considers them “goods.”
  • Neither Schedule III of the GST Act nor any governmental notification addresses bitcoin or digital asset sales under the exemption. So, GST applies to digital asset sales, including cryptocurrencies.

Who Pays GST, HSN Code, and Cryptocurrency/Digital Asset Supply?

Cryptocurrency can be acquired through exchanges or mining. Goods suppliers must collect GST under GST law. Thus, bitcoin or digital asset sellers must pay GST and collect from buyers regardless of exchange or method.

Since digital assets do not have an HSN code or rate, we can utilize HSN code 960899, which is “other miscellaneous article” and charges 18% (the highest in this category).

Only those who have voluntarily registered for GST or have sales or turnover exceeding Rs 40 lakhs in the fiscal year must pay GST.

Cryptocurrency and Digital Asset GST Tax Credit Claims

Only business-use products and services qualify for GST input tax credit.

Cryptocurrency, digital assets, and other cryptocurrency trading items and services are subject to GST. Digital assets might get input tax credited. Additional services include broker commission, consultation fees, software, digital asset creation costs, etc.

captainbiz cryptocurrency and digital asset gst tax credit claims

Image Source – https://economictimes.indiatimes.com/tech/technology/11-indian-crypto-exchanges-evaded-rs-81-54-crore-gst-govt-says/articleshow/90493542.cms

Preliminary Decisions

Leading bitcoin exchanges want to know if GST applies to digital assets or cryptocurrency. Any GST rule changes could hurt investors and cryptocurrency exchanges since over 10 lakh people have invested over Rs. 400 crore in cryptocurrencies.

Which Indian Crypto Transactions Are Taxable?

These actions incur a 30% tax:

  • Buying something with cryptocurrency.
  • Cryptocurrency swaps involve trading fiat currencies like the Indian Rupee (INR) for cryptocurrencies.
  • Get cryptocurrency for your labor.
  • Giving and receiving crypto
  • Cryptocurrency Mining
  • Payment with cryptocurrency
  • Airdrops Received

Understanding TDS on Crypto Transactions

The Tax Deducted at Source (TDS) method collects tax income from crypto traders and investors during transactions. When paying a vendor, a buyer must subtract TDS and send it to the central government.

Only the remaining amount goes to the merchant. India taxes cryptocurrency by 1%. Before sending payment to the vendor after July 1, 2022, the buyer must deduct 1% TDS. For exchange transactions, the exchange may retain the TDS and deliver the remaining cash to the seller.

International exchange traders must manually deduct and report TDS, while Indian exchanges do so automatically.

  • Buyers of peer-to-peer (P2P) transactions must deduct TDS and submit Form 26QE or 26Q, depending on the situation. INR cryptocurrency purchases on P2P networks or overseas exchanges are examples.
  • Crypto-to-crypto transactions incur 1% TDS for both parties. Stablecoins can buy cryptocurrencies.

On What Amount Will Crypto Mining be Taxed? 

The quantity of crypto mining tax depends on the following elements. See this: 

  • Receiving crypto

Rule 11UA taxes crypto assets earned while mining at its fair market value on the date of receipt, based on the token’s trading volume on an exchange or DEX. That sum will be taxed at 30%.

  • Sell, swap, or send them later

Profits from selling, exchanging, or utilizing these assets are taxed at 30%.

Schedule of Assets and Liabilities to Include Cryptocurrencies

Every company must record its cryptocurrency ownership and transactions to the MCA. The cryptocurrency’s market value on the balance sheet date must be mentioned. New schedule III provisions of the Companies Act will take effect on 1 April 2021. This directive marks the government’s first step toward controlling cryptocurrency.

Please note that only enterprises must comply with this regulation. All cryptocurrency investors must report and pay taxes on Bitcoin earnings. 

Taxing Cryptocurrencies Challenges

Some of the major  cryptocurrencies challenges are as follows: 

  • Volatility

Cryptocurrency values fluctuate, making tax valuations difficult. A cryptocurrency’s worth at acquisition may differ greatly from its transaction value.

  • Anonymous

Cryptocurrencies are typically anonymous. The blockchain records transactions, but parties’ identities may be difficult to trace. This anonymity raises tax evasion and money laundering issues, forcing tax authorities to build robust tracking methods.

  • Global Nature

Cryptocurrencies span the globe. Tax authorities struggle to establish jurisdiction and execute tax laws in a decentralized setting.

GST and Cryptocurrencies: Global Views

Different nations tax cryptocurrencies differently under GST. Cryptocurrencies are taxed as commodities or services in some countries but not as currency in others.

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Image Source – https://www.forbes.com/sites/oluwaseunadeyanju/2021/09/14/bitcoin-opportunity-africa-adoption-rate-is-highest-globally/?sh=6ca541d46d57

  • Australia

Australia was an early adopter of a complete GST structure for cryptocurrencies. Bitcoin was initially taxed twice—with GST at purchase and use. However, in 2017, Australia exempted cryptocurrencies from GST, making them legal money.

  • United States

The IRS sees cryptocurrencies as property, not currency, in the US. This means Bitcoin transactions are subject to capital gains tax and must be reported.

  • European Union

EU member states have distinct cryptocurrency taxation policies. Germany exempts cryptocurrencies from VAT since they are a form of payment, but France taxes them as capital gains.

Digital asset taxation has been a challenge in India, a fast-growing cryptocurrency sector. The RBI is concerned about cryptocurrencies’ influence on financial stability and consumer protection. India has not addressed the GST status of cryptocurrencies, which are not legal tender.

The lack of clarity has left bitcoin firms and investors apprehensive. Some believe cryptocurrencies should be taxed like commodities or services, while others believe they should be GST-exempt. The cryptocurrency sector in India is hampered by unclear legislation, which makes compliance difficult for enterprises.

Possible Solutions and Future Thoughts

There  can be an ample number of  solutions and future thoughts when it comes to shaping the current situation of GST and the taxation  of cryptocurrencies: 

  • Harmonization of Regulations

Cryptocurrency tax treatment across countries could clarify matters for firms and users. Cryptocurrencies are global, so international cooperation is essential to prevent regulatory arbitrage.

  • Technology-Assisted Compliance

As blockchain technology grows, tax authorities can use it to streamline compliance. Transparent and traceable technologies can reduce anonymity issues and improve tax filing.

  • Educational Initiatives

Governments and regulators should fund cryptocurrency taxation education. Educational taxpayers comply with legislation more often, reducing tax avoidance.

  • Tokenomics and Utility Tokens

Cryptocurrencies can serve as utility tokens inside an ecosystem, beyond only exchange. Tokens used to access a platform or service complicate taxation. Understanding utility tokens and the services they enable is necessary to determine their GST treatment.

  • Smart Contracts and Automation

The inclusion of smart contracts in blockchain transactions offers automation that traditional tax systems may not be able to manage. Tax authorities struggle to oversee and tax-smart contracts since they autonomously execute predefined requirements. A thorough taxation plan must account for smart contract automation.

  • Stablecoins and Pegged Assets

The advent of stablecoins, which are tethered to existing currencies to reduce volatility, creates a new GST treatment difficulty. Stablecoins strive to maintain a stable value, but their methods and possible swings present GST categorization and taxation concerns.

  • Regulatory Sandboxes and Innovation

Some jurisdictions have implemented regulatory sandboxes to promote innovation in fintech and cryptocurrency. Sandboxes let firms test new technologies and services in a controlled environment. Finding the GST implications in these experimental systems is complicated, requiring regulators to balance innovation and tax compliance.

  • Cross-Border Transactions

Cryptocurrencies, which transcend borders, enable smooth cross-border transactions. As jurisdictions grow more fluid, tax models are challenged. Universal GST rules for cross-border cryptocurrency transactions are needed to avoid double taxation and ensure fairness worldwide.

Bottom Line

Finally, the confluence of cryptocurrencies and taxation, notably the GST, shows the ever-changing digital financial ecosystem. Today, over 1,500 GST virtual digital asset taxation currencies are traded, demonstrating cryptocurrency’s popularity. The Indian tax system classifies crypto assets, NFTs, tokens, and cryptocurrencies as virtual digital assets (VDAs).

Indian tax code taxes bitcoin trading profits at 30% plus a 4% cess. A 1% Tax Deducted at Source (TDS) on crypto asset transfers over ₹50,000 enhances regulatory protections. All crypto transactions are taxed at 30%. You can purchase, sell, exchange, and receive.

When dealing with Bitcoin, individuals and companies must follow tax laws. By mandating corporate disclosures, the government is promoting regulatory transparency, which is crucial for managing this burgeoning sector. Currently, only companies are subject to this legislation, but individual filers may soon be required to declare and pay tax on bitcoin earnings. Due to the ever-changing nature of these restrictions, Bitcoin taxes in India require constant attention.

Also Read: GST Applicability On Cryptocurrency

FAQs

  • Is India Taxing Cryptocurrencies?

In India, cryptocurrency gains are taxable. The government clarified its stance on cryptocurrencies and other VDAs in the 2022 Budget.

  • How to Calculate Cryptocurrency Taxes?

After establishing that cryptocurrency revenues are taxed at 30%, we will investigate their calculation.

  • Is Cryptocurrency an Asset or Currency?

“Virtual Digital Assets” (VDAs) are cryptocurrencies and NFTs. VDAs include all crypto assets, tokens, and cryptocurrencies except gift cards and vouchers.

  • Which Cryptocurrencies Are Taxable in India?

Spending, exchanging, trading, receiving as payment, receiving as a gift, mining, earning a cryptocurrency wage, staking, and getting airdrops are all taxed 30%.

  • How are TDS Implemented?

The consumer must deduct TDS and file Form 26QE or 26Q when buying cryptocurrency with INR on a P2P network or foreign exchange.

  • Is Cryptocurrency Asset Disclosure Required?

The Ministry of Corporate Affairs requires enterprises to declare virtual currency gains and losses, a step toward cryptocurrency regulation.

  • Should Individual Taxpayers Report Like Corporations?

Companies must record virtual currency gains and losses. Individuals must report and tax cryptocurrency gains, but they are not required to disclose them like corporations.

  • What is a “Virtual Digital Asset” (VDA)?

VDA includes all crypto assets, NFTs, tokens, and cryptocurrencies, except gift cards and vouchers, as described in Income Tax Act Section 2(47A).

  • Are Cryptocurrency Gains Taxed Differently Depending on Holding Time?

India taxes earnings from trading, selling, or exchanging cryptocurrencies at 30% (plus a 4% surcharge) regardless of holding term.

  • How does TDS affect forex transactions?

Indian exchanges automatically subtract 1% TDS and file TDS returns, but foreign exchange traders must manually deduct and file.

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Moulik Jain

I am a seasoned marketer specializing in Tax, Finance, and MSMEs who brings a wealth of hands-on experience to demystify complex subjects, providing insightful guidance for entrepreneurs and finance enthusiasts alike.

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