Cryptocurrency and Taxation Challenges

Cryptocurrencies have appeared in the news recently, as tax authorities believe they can be used to launder money and evade taxes. Even the Supreme Court appointed a special investigative group on black money, which recommended to prevent trade in such currency. Although China has reportedly banned the operation of major bitcoin traders, countries such as the United States and Canada have laws restricting the trading of cryptocurrency stocks.

What is a cryptocurrency?

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

How are transactions with cryptocurrency made?

When a transaction is initiated by a single user, her computer sends a public cipher or public key that interacts with the private cipher of the person receiving the currency. When the receiver accepts a transaction, the initiative computer attaches a piece of code to a block of several such encrypted codes known to each user on the network. Special users, called “Miner”, can attach additional code to a public block by solving a cryptographic puzzle, and earn more cryptocurrency in the process. Once Miner confirms the transaction, the entry in the block cannot be changed or deleted.

For example, BitCoin can be used on mobile devices to make purchases. All you need to do is allow the receiver to scan the QR code from the app on your smartphone or face them face to face using NFC (Near Field Communication). Note that this is very similar to regular online wallets such as PayTM or MobiQuick.

Stubborn users swear by BitCoin for its decentralization, international recognition, anonymity, transaction maturity and data security. Unlike paper currency, no Central Bank controls inflationary pressures on cryptocurrency. Transaction books are stored in the Peer-to-Peer network. This means that each computer chip in its computing power and copies of databases are stored on each such node in the network. On the other hand, banks store transaction data in central repositories held by individuals hired by the firm.

How can you use cryptocurrency to launder money?

The very fact that there is no control over cryptocurrency transactions by central banks and tax authorities means that transactions cannot always be identified by a particular person. This means that we do not know whether the transaction has received legal retention of value. The transaction store is also a suspect, as no one can say what attention was taken into account for the currency received.

What does Indian law say about such virtual currencies?

Virtual currencies or cryptocurrencies are commonly treated as software and are accordingly classified as commodities under the Sale of Goods Act 1930.

Being good, indirect taxes on their sale or purchase, as well as taxes on goods and services provided by Miner, may apply to them.

So far, there is quite a bit of confusion as to whether real cryptocurrencies as a currency in India, and RBI, which has authority over clearing and payment systems and prepaid current instruments, are certainly not allowed to buy and sell through this medium.

Any cryptocurrencies received by a resident of India will thus be governed by the Foreign Exchange Management Act 1999 as imports of goods into that country.

India has allowed bitcoins to be traded on special exchanges with built-in guarantees of tax evasion and money laundering and enforcement of the “Know Your Customers” norms. These exchanges include Zebpay, Unocoin and Coinsecure.

For example, those who invest in bitcoin must pay from the dividends received.

Capital gains resulting from the sale of securities involving virtual currencies are also taxable as income and as a consequence of filing IT returns online.

If your investment in this currency is large, you better get the help of a personal tax office. Online platforms have greatly facilitated the tax collection process.