Bitcoins - Income Tax, GST & International Taxation Structure

[CA.Ankit Gulgulia]

Bitcoins - Income Tax, GST & International Taxation Structure

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

If you interested to understand the Taxation of Bitcoins, How to Compute Income Tax on Bitcoins, How to Disclose in ITR, Whether loss on Bitcoins are 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 on 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 a 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 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 a 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 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 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.

Don't Forget to Disclose

It won’t be proper to not disclose the earnings from crypto investments, simply because there is no clarity on taxation.

While cryptocurrencies have not been categorised under any tax bracket, so far. But the Income Tax Department can monitor earnings of cryptocurrency investors that are registered through KYC/AML compliant exchanges, with the help of PAN

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

1. Belarus
2. Germany
3. Hong Kong
4. Malaysia
5. Malta
6. Portugal
7. Singapore !
8. Slovenia
9. Switzerland
10. 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.

Q: Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?

A: Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.

Q: How is the fair market value of virtual currency determined?

A: For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.

Taxation of Bitcoins in Canada

As mentioned, the Canada Revenue Agency treats bitcoin-and digital currencies generally-as a commodity for income-tax purposes. As a result, bitcoin transactions are subject to the same rules as barter transactions-that is, transactions where one commodity is exchanged for another.

Generally, this means that a gain or loss from a bitcoin transaction will be treated as either (i) income or loss from business or property or (ii) a capital gain or loss. The difference comes with important tax implications. The full amount of business or property income is taxable, while only one-half of a capital gain is taxable. On the flip side, while only one-half of capital losses are deductible, one may fully deduct losses associated with business or investment activity.

Similarly, a person who mines bitcoins may be thought of as either acquiring a capital property or earning business income. If thought of as acquiring a capital property, the miner’s adjusted cost base would be the bitcoin’s fair market value at the time of acquisition. Also, since bitcoin mining demands considerable computing resources, a bitcoin’s adjusted cost base would presumably include the cost of generating the computer power necessary to acquire the coin. The miner thus incurs a capital gain or loss depending on the bitcoin’s value upon disposition.

Taxation of Bitcoin in Germany (How it is a Tax Haven)

Germany: no tax if you hold Bitcoin for one year

As opposed to most developed countries, Germany doesn’t see cryptos as currencies, commodities, or stocks. Instead, Bitcoin and altcoins are considered private money. This distinction is important since private sales bring tax benefits in Germany.

According to rule 23 EStG, private sales that do not exceed 600 euros are tax exempted. But perhaps even more interesting is the fact that you pay no tax if you hold your Bitcoin, Litecoin, Ethereum, Ripple, or other altcoins, for a period of over one year. No matter how much you make selling your cryptocurrencies, you don’t pay tax on the capital gains if you’ve held them for over one year.

Example of the German ‘Bitcoin tax’

For the sake of this example, let’s suppose you have been resident in Germany for the past few years. On 1 January 2017, you bought 1 BTC for $1,000. If you sold it on December 15th to enjoy a little Christmas bonus worth $17,000, you would have to pay your capital gains tax over the $16,000 profit. If, however, you had held your Bitcoin past 1 January 2018, all capital gains tax would be waived.

If you are currently in Germany and you are holding a (fraction of) Bitcoin you bought back in 2017, it may be worth sitting out that year. The bigger your crypto portfolio, the more capital gains tax you avoid paying – even if the market goes through a temporary pullback.

Taxation of Bitcoins in UK

For Indivuals

In the vast majority of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation in its value or to make particular purchases. They will be liable to pay Capital Gains Tax when they dispose of their cryptoassets.

Individuals will be liable to pay Income Tax and National Insurance contributions on cryptoassets which they receive

For Businesses

If a company or business is carrying out activities which involve exchange tokens, they are liable to pay tax on them.

Such activities include: buying and selling exchange tokens, exchanging tokens for other assets (including other types of cryptoassets), ‘mining’, providing goods or services in return for exchange tokens, The type of tax will depend on who is involved in the business and the activities it carries out (including whether these count as a trade).

Taxation of Bitcoins in South Africa

The South African Revenue Service (SARS) considers cryptocurrencies such as Bitcoin to be “assets of an intangible nature,” as opposed to currency or property.

Income “received or accrued” from cryptocurrency falls under the definition of “gross income” according to the tax act. However, under certain circumstances, gains may be considered capital under the Eighth Schedule to the tax act.

In both cases, the tax rules for cryptocurrency allow for deducting costs. For example, in the case of income, taxpayers may claim expenses on their taxes. In the case of Capital Gains Taxes (CGTs), the cost of purchasing the crypto is considered for determining the taxable amount. Thus, you only pay capital gains on any appreciation your crypto has made.

Taxation of Bitcoins in Australia

In short, cryptocurrencies are subject to capital gain tax (CGT) and ordinary income tax in Australia, depending on the circumstances of the transaction.

CGT is the tax you pay on the difference between the Australian Dollar (AUD) value of the disposed asset at the time of the disposition minus the AUD value of the disposed asset at the time it was acquired.

If the assets have been held by an individual for more than 12 before selling, you can apply a CGT discount:

50% for resident individuals (including partners in partnerships)

33.33% for complying super funds and eligible life insurance companies

50% discount is removed or reduced on capital gains made after 8 May 2012 for foreign resident individuals

Total taxable capital gain = (capital gains – capital losses) * capital gains discount = (capital proceeds – (cost basis + fees)) * capital gains discount

Note: capital losses are subtracted from capital gains before applying any relevant CGT discounts

If the assets have been held for 12 months or less, then CGT discounts do not apply.

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.