Cryptocurrencies and tax challenges

Cryptocurrencies have been in the news recently because tax authorities believe they can be laundered and tax evaded. Even the Supreme Court has appointed a Special Investigation Team for Black Money to discourage trading in such currency. Although China has reportedly banned some of its largest bitcoin trading operators, countries like the US and Canada have laws restricting trading in cryptocurrency stocks.

What is a cryptocurrency?

Cryptocurrency, as the name suggests, uses encrypted codes to execute the transaction. These codes are recognized by other computers in the user community. Instead of using paper money, the online ledger is updated with the usual ledgers. The buyer’s account is debited, and the seller’s account is posted in that currency.

How are cryptocurrency transactions executed?

When a transaction is initiated by a single user, its computer sends a public code or public key that communicates with the private code 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 known to each user on the network. Special users called ‘Miners’ can attach additional code to a publicly shared block by solving a cryptographic puzzle and earn more cryptocurrencies in the process. Once the miner confirms the transaction, the record in the block cannot be changed or deleted.

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

Hard users swear by BitCoin because of its decentralized nature, international acceptance, anonymity, transaction durability, and data security. Unlike paper currency, no Central Bank controls inflationary pressures on cryptocurrencies. Transaction books are stored in the Peer-to-Peer network. This means that all computer chips in their computing power and copies of databases are stored on each such node in the network. On the other hand, banks store transaction data in central repositories that are in the hands of private individuals hired by the firm.

How can cryptocurrency be used for money laundering?

The very fact that central banks or tax authorities do not control cryptocurrency transactions means that transactions cannot always be labeled by a particular individual. This means that we do not know whether the transferor has legally acquired the value store or not. The transaction trade is similarly suspicious because no one can say what fee was taken for the currency received.

What does Indian law say about such virtual currencies?

Virtual currencies or cryptocurrencies are usually considered software parts and are therefore classified as goods under the Sale of Goods Act 1930.

As a good, indirect taxes on their sale or purchase, as well as a tax on services provided by miners, would be applicable to them.

There is still considerable confusion about whether cryptocurrencies are valid as a currency in India, and the RBI, which has jurisdiction over clearing and payment systems and prepaid transferable instruments, has certainly not approved buying and selling through this medium of exchange.

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

India has allowed bitcoin trading in special exchanges with built-in safeguards for tax evasion or money laundering activities and the implementation of the “Meet Your Customer” norms. These exchanges include Zebpay, Unocoin and Coinsecure.

For example, those who invest in BitCoins are required to collect dividends received.

Capital gains from the sale of securities involving virtual currencies are also taxed as income and the consequent online filing of IT applications.

If your investments in this currency are large, it is better to get the help of a personalized tax service. Internet platforms have greatly facilitated the tax harmonization process.