Cryptocurrency and Taxation Challenges

Virtual currencies have been in the news lately as tax authorities believe they can be used for money laundering and tax evasion. Even the Supreme Court has set up a special investigative team on black money and recommends discouraging trading in such currencies. China has reportedly banned some of the largest bitcoin traders, while countries such as the United States and Canada have enacted laws restricting crypto stock trading.

Cryptocurrencies, as the name suggests, use encrypted codes to conduct transactions. These codes are recognized by other computers within the user community. Instead of using banknotes, an online ledger is updated with regular accounting entries. This currency will be debited from the buyer's account and credited to the seller's account.

How do virtual currency transactions work?

When a user initiates a transaction, the user's computer issues a public cipher or key that interacts with the private cipher of the currency recipient. When the recipient accepts the transaction, the initiating computer adds a code known to all users on the network to such an encrypted block of code. Special users, called "miners," can add additional code to public shared blocks by solving cryptographic puzzles and earning more cryptocurrency in the process. Once a miner confirms a transaction, it cannot modify or delete records within the block. For example,

Bitcoin can also be used for purchases on mobile devices. Simply have your recipient scan the QR code from a smartphone app, or use Near Field Communication (NFC) to guide you in person. Note that this is very similar to regular online wallets such as Pay TM or Bisquick.

Die-hard users trust Bitcoin for its decentralization, international acceptance, anonymity, transaction durability, and data security.

Unlike paper money, there is no central bank controlling inflationary pressures on cryptocurrencies. Transaction books are stored in a peer-to-peer network. This means that a copy of each computer chip's processing power and database is stored on each of these nodes in the network. Banks, on the other hand, store transaction data in a central repository in the hands of individuals hired by the company.

How are cryptocurrencies used for money laundering?

The fact that cryptocurrency transactions are not controlled by a central bank or tax authority means that transactions cannot always be traced back to a specific individual. Means that you don't know if you got it. The business of the recipient of the transaction is similarly questionable, as no one knows what consideration was paid for the currency received.

What does Indian law say about such virtual currency?

Virtual currency or virtual currency is generally regarded as software and is therefore classified as a commodity under the Sale of Goods Act, 1930.

As a commodity, it is subject to indirect tax on its sale or purchase and GST on services provided by miners.

There is still considerable confusion whether cryptocurrencies are valid as currency in India and although the RBI has the authority over the clearing and payment system and prepaid tradable instruments, it is not possible to buy or sell through this medium of exchange. Certainly not approved.

Therefore, all virtual currency received by a resident of India is subject to the Foreign Exchange Control Act, 1999 as a commodity imported into that country.

India allows bitcoin trading on dedicated exchanges with built-in protections against tax evasion and money laundering activities and enforces Know Your Customer standards. These exchanges include Repay, Undoing, and Conjecture.

For example, a person who invests in Bitcoins must claim the dividend received.

Capital gains from the sale of securities for virtual currency are also taxed as income and the resulting online filing of IT returns