Challenges related to cryptocurrency and taxation

Cryptocurrencies have been in the news recently because tax authorities believe they can be used to launder money and evade taxes. Even the Supreme Court appointed a special black money investigation team recommended that trading in this currency be discouraged. While China has reportedly banned some of its biggest Bitcoin trading operators, countries like the United States and Canada have implemented laws to restrict trading in cryptocurrency stocks.

What is cryptocurrency?

cryptocurrency, as the name suggests, uses encrypted codes to complete a transaction. These codes are recognized by other computers in the user community. Instead of using paper money, an online ledger is updated by ordinary accounting entries. The buyer’s account is debited and the seller’s account is credited with this currency.

How are transactions carried out on cryptocurrency?

When a transaction is initiated by a user, their computer sends a public cipher or public key which interacts with the private cipher of the person receiving the currency. If the receiver accepts the transaction, the initiating computer attaches a piece of code to a block of several of these encrypted codes that is known to every network user. Special users called “miners” can attach the additional code to the publicly shared block by solving a cryptographic puzzle and earn more cryptocurrency in the process. Once a miner confirms a transaction, the record in the block cannot be edited or deleted.

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

Diehard users swear by BitCoin for its decentralized nature, international acceptance, anonymity, transaction permanence, and data security. Unlike paper money, no central bank controls inflationary pressures on cryptocurrency. Transaction records are stored in a Peer-to-Peer network. This means that each computer chip in its computing power and copies of databases are stored on each of these network nodes. Banks, on the other hand, store transaction data in central repositories that are in the hands of individuals hired by the company.

How can cryptocurrency be used for money laundering?

The very fact that there is no control over cryptocurrency transactions by central banks or tax authorities means that transactions cannot always be traced to a particular individual. This means that we do not know whether the trader obtained the store of value legally or not. The store of the beneficiary of the operation is also suspect because no one can tell what consideration was given for the currency received.

What does Indian law say about these virtual currencies?

Virtual currencies or cryptocurrencies are generally considered software and are therefore classified as property under the Sale of Goods Act 1930.

In the case of goods, indirect taxes on their sale or purchase as well as GST on services rendered by Minors would apply to them.

There is still some confusion about the validity of cryptocurrencies as currency in India and the RBI, which has authority over clearing and payment systems and prepaid negotiable instruments, has certainly not authorized the purchase and sale via this medium of exchange.

Any cryptocurrency received by a resident of India would thus be governed by the Foreign Exchange Management Act 1999 as an import of goods into that country.

India has allowed BitCoins to be traded on special exchanges with built-in safeguards for tax evasion or money laundering activities and application of Know Your Customer standards. These exchanges include Zebpay, Unocoin, and Coinsecure.

Those who invest in BitCoins, for example, are likely to be charged on dividends received.

Capital gains received due to the sale of securities involving virtual currencies are also likely to be taxed as income and the resulting online filing of computer returns.

If your investments in this currency are large, you better be assisted by a personalized tax service. Online platforms have greatly facilitated the tax compliance process.