Cryptocurrency And Taxation Challenges

 

Recent news about cryptocurrencies has been because tax authorities believe that they can be used as a way to launder money or evade taxes. The Supreme Court has appointed a Special Investigating Team on Black Money to investigate the issue and recommend that such currency not be traded. China is reported to have banned Bitcoin traders from its biggest operators. However, Canada and the USA have laws that prohibit stock trading in cryptocurrency.

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What is Cryptocurrency?

Cryptocurrency uses encrypted codes to make a transaction, as its name implies. These codes can be recognized by other computers within the user community. An online ledger can be updated using regular bookkeeping entries, instead of paper money. The seller's account gets debited, and the buyer's account gets credited with such currency.

What are the Transactions on Cryptocurrency and How Do They Work?

A transaction initiated by one user sends a public cipher (or public key) to her computer. This interacts with the private code of the recipient. The initiating computer attaches a code to a block that contains several encrypted codes. This information is available to all users in the network. Special users known as "Miners" can attach an extra code to the publicly-shared block by solving a cryptographic puzzle. They also earn more cryptocurrency. The record in the block can't be altered or deleted once a miner has confirmed a transaction.

BitCoin can also be used on mobile devices to make purchases. You can simply scan the QR code on your smartphone and bring the receiver face-to-face using Near Field Communication (NFC). This is similar to regular online wallets like MobiQuick or PayTM.

BitCoin is loved by many because of its anonymity, decentralized nature and international acceptance. No Central Bank can control inflationary pressures on cryptocurrency, unlike paper currency. Peer-to–Peer networks store transaction ledgers. This means that every computer chip in its computing power, and copies of databases, are stored on every node in the network. Private individuals are able to access transaction data stored in central repositories by banks.

What can Cryptocurrency do for money laundering?

Because there is no central bank or tax authority that can control cryptocurrency transactions, transactions cannot be traced to an individual. We don't know if the transactor obtained the store value legally. Similar to the transactee's store, nobody knows what currency was received in exchange.

What does Indian Law say about virtual currencies?

Virtual Currencies, or cryptocurrency, are often seen as software pieces and therefore fall under the Sale of Goods Act of 1930.

They would be considered a good seller and buyer, and they would be subject to indirect taxes as well as GST for the services provided in their name by miners.

It is unclear whether cryptocurrencies can be used as currency in India. The RBI, which has authority on clearing and payment systems, and pre-paid negotiable instrument, has not yet authorized the purchase and sale of cryptocurrencies.

Foreign Exchange Management Act 1999 governs any cryptocurrency received by Indian residents. It also regulates imports of goods into India.

India has permitted the trading of BitCoins on Special Exchanges. These exchanges have built-in safeguards against tax evasion and money laundering activities, as well as enforcement of Know Your Customer norms. These exchanges include Coinsecure, Unocoin, Zebpay.

For instance, BitCoins investors may be subject to a charge for dividends received.

Capital gains from the sale of securities that involve Virtual currencies can also be subject to income tax and subsequent online filing of IT returns.