Cryptocurrency and tax challenges

Cryptocurrencies have recently been in the news because tax authorities believe they can be used for money laundering and tax evasion. Even the Supreme Court has appointed a special investigation team on black money and recommended that trading in such currency be discouraged. While China has reportedly banned some of its largest bitcoin trading operators, countries such as the United States and Canada have laws restricting the trading of cryptocurrency stocks.

What is a cryptocurrency?

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

How are cryptocurrency transactions made?

When a transaction is initiated by a user, its computer sends a public cipher or public key that interacts with the private cipher of the person receiving the currency. If the recipient accepts the transaction, the initiating computer attaches a piece of code to a block of several such encrypted codes, which is known to each user on the network. Special users, called Miners, can attach the additional code to the publicly shared block by solving a cryptographic puzzle and winning more cryptocurrency in the process. Once a miner confirms a transaction, the block entry cannot be changed or deleted.

BitCoin, for example, can also be used on mobile devices to make purchases. All you need to do is allow the receiver to scan a QR code from an app on your smartphone or confront them face to face using near field communication (NFC). Keep in mind that this is very similar to regular online wallets such as PayTM or MobiQuick.

Stubborn users swear by BitCoin because of its decentralized nature, international acceptance, anonymity, consistency of transactions and data security. Unlike paper currency, no central bank controls inflationary pressures on cryptocurrencies. Transaction books are stored on a Peer-to-Peer network. This means that each computer chip in its computing power and copies of databases are stored on each such node in the network. On the other hand, banks store data on transactions in central repositories, which are in the hands of private 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 marked on a specific person. This means that we do not know whether the trader received the stock legally or not. The store of the deal is also suspicious, as no one can say what has been taken into account for the currency received.

What does Indian law say about such virtual currencies?

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

As good indirect taxes on their sale or purchase, as well as GST on the services provided by Miners, would be applicable to them.

There is still a lot of confusion about whether cryptocurrencies are valid as a currency in India, and RBI, which has powers for clearing and payment systems and prepaid contractual instruments, has certainly not allowed sales through this exchange medium.

All cryptocurrencies received by a local person in India will thus be governed by the Foreign Exchange Management Act 1999 as imports of goods into that country.

India has allowed bitcoin trading on special exchanges with built-in safeguards for tax evasion or money laundering and the application of the “Know Your Customers” standards. These exchanges include Zebpay, Unocoin and Coinsecure.

Investors in bitcoins, for example, are required to accrue on dividends received.

Capital gains resulting from the sale of securities involving virtual currencies are also subject to taxation as income and subsequent online filing of IT returns.

If your investment in this currency is large, it is better to get the help of a personalized tax office. Online platforms have made the process of tax compliance much easier.