Become Familiar with Cryptocurrency and Taxation Issues

Cryptocurrencies have recently made headlines because tax authorities believe they can be used to launder money and avoid paying taxes. Even the Supreme Court, which appointed a Special Investigating Team on Black Money, advised against trading in such currency.

What exactly is cryptocurrency?

Cryptocurrency, as the name implies, uses encrypted codes to carry out transactions. Other computers in the user community recognise these codes. An online ledger is updated by ordinary bookkeeping entries rather than paper money. The buyer’s account is debited, while the seller’s account is credited.

Among the crypto definitions are:

  • Cryptocurrency: electronic money, also known as digital money.
  • Fiat money: any legal tender that is backed by the government and is used in the banking system.
  • Bitcoin: the first and only cryptocurrency.
  • Altcoin: other cryptocurrencies based on the same processes as Bitcoin, but with minor differences in their coding.
  • Miners: an individual or group of individuals who mine digital coins using their resources (computers, electricity, and space).
  • A specialised computer designed specifically for finding new coins by running a series of algorithms.
  • Wallet: a small file on your computer that stores your digital currency.

How Do Cryptocurrency Transactions Work?

When one user initiates a transaction, her computer sends a public cypher or public key, which interacts with the private cypher of the person receiving the currency. If the receiver accepts the transaction, the initiating computer adds a piece of code to a block of several such encrypted codes known to all network users. Miners are special users who can add extra code to the publicly shared block by solving a cryptographic puzzle and earning more cryptocurrency in the process. The record in the block cannot be changed or deleted once a miner confirms a transaction.

How Can Cryptocurrency Be Used to Launder Money?

Because there is no control over cryptocurrency transactions by Central Banks or tax authorities, transactions cannot always be linked to a specific individual. This means we don’t know whether or not the transactor obtained the store of value legally. The transaction’s store is also suspect because no one knows what was given in exchange for the currency received.

What does Indian law have to say about virtual currencies?

Virtual currencies, also known as cryptocurrencies, are commonly regarded as pieces of software and thus qualify as goods under the Sale of Goods Act of 1930.

Because they are good, they will be subject to indirect taxes on their sale or purchase, as well as GST on the services provided by Miners.

There is still some uncertainty about whether cryptocurrencies are legal tender in India, and the RBI, which has authority over clearing and payment systems as well as pre-paid negotiable instruments, has not authorised buying and selling through this medium of exchange.

Any cryptocurrencies received by an Indian resident would thus be subject to the Foreign Exchange Management Act, 1999 as an import of goods into India.

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