Cryptocurrency and taxation challenges

Cryptocurrencies have been in the news recently because tax authorities believe they could be used for money laundering and tax evasion. Even the Supreme Court has recommended appointing a special inquiry team on black money to discourage trade in such currencies. Although China has reportedly banned some of its largest bitcoin trading operators, countries such as the United States and Canada have laws restricting stock trading in cryptocurrencies.

What is cryptocurrency?

Cryptocurrency, as the name implies, uses encrypted code to execute a transaction. These codes are recognized by other computers in the user community. Instead of using paper money, an online ledger is updated by a general accounting entry. The buyer’s account is debited and such currency is credited to the seller’s account.

How are transactions made in cryptocurrency?

When a user initiates a transaction, his computer sends a public cipher or public key that communicates with the recipient’s personal cipher. If the recipient accepts the transaction, it encloses a portion of the primary computer code in a block of a few encrypted codes known to each user on the network. Special users, known as ‘miners’, can solve a cryptographic puzzle by adding additional code to publicly shared blocks and earning more cryptocurrency in the process. Once a mine confirms a transaction, the block record cannot be changed or deleted.

Bitcoin, for example, can also be used on mobile devices to facilitate purchases. All you have to do is let the receiver scan a QR code from an app on your smartphone or bring them face to face using Near Field Communication (NFC). Keep in mind that it’s just like a normal online wallet like PayTM or MobiQuick.

Die-hard users swear by the decentralized nature of Bitcoin, international recognition, anonymity, transaction stability and data protection. Unlike paper money, no central bank controls inflationary pressures on cryptocurrencies. The transaction ledger is stored on a peer-to-peer network. This means that the computing power of each computer chip and the copy of the database are stored in each node of the network. Banks, on the other hand, store transaction data in central repositories that are in the hands of individuals employed by the firm.

How can Cryptocurrency be used for money laundering?

The fact that the central bank or tax authorities have no control over cryptocurrency transactions means that transactions cannot always be tagged to a specific person. This means that we do not know whether the transaction has been legally received by the value store. The transaction store is similarly suspicious because no one can say what was considered for the currency received.

What does Indian law say about this type of virtual currency?

Virtual currencies or cryptocurrencies are generally viewed as pieces of software and are therefore classified as a good under the Sales Act, 1930.

As it is good, indirect tax on their sale or purchase as well as GST will be applicable on the services provided by the miners.

There is still considerable confusion as to whether cryptocurrencies are legal tender in India, and the RBI, which has authority over clearing and payment systems and prepaid negotiable instruments, has certainly not allowed buying and selling through these exchanges.

Any cryptocurrency obtained by a resident of India will thus be regulated by the Foreign Exchange Management Act, 1999 as import of goods into this country.

India has allowed Bitcoin trading on special exchanges with built-in protection for tax evasion or money laundering activities and enforcement of the Know Your Customer rule. These exchanges include Zebpay, Unocoin and Coinsecure.

For example, those who are investing in Bitcoin will be charged on the dividends they receive.

The return on capital gains due to the sale of securities involving virtual currency is also an income and as a result tax is required to file an IT return online.

If your investment in this currency is large, you are better off getting help from a personalized tax service. Online platforms have come a long way and made the tax compliance process easier.