The Finance Ministry has formed a working committee to look into the taxation of cryptocurrency trading profits. The committee will look into whether the government can tax cryptocurrency trading income as capital gains or if it should create a new category for the purpose.
What are Capital Gains?
According to section 45(1) of the Income Tax Act 1961, any profit & gain arising from the ‘transfer of a capital asset’ shall be chargeable under the head ‘Capital Gains’ in the previous year in which transfer took place.
Further as per section 2(47) Transfer includes:
- The sale, exchange, or relinquishment of the capital asset;
- Extinguishment of any right
- Compulsory acquisition
- Conversion of capital asset into stock-in-trade
- And, Redemption of zero-coupon bonds
What more do we know about this committee?
The panel will have to submit its report in 4 weeks. The Finance Minister recently announced that the Cryptocurrency bill is tabled before the cabinet and is awaiting its approval. The government will likely present the bill in the upcoming winter session of the parliament.
The government is also working towards defining and categorizing cryptocurrencies as an asset class, such as gold. It is also planning to define Non-Fungible Tokens (NFTs) in the cryptocurrency bill and its scope of taxation. As reported earlier, it is the first time cryptocurrencies will be classified on the basis of the technology they employ. The government’s attention, for regulatory purposes, will be on the asset’s end-use.
An earlier committee of the Finance Ministry, headed by former Secretary of Finance Mr. Subash Chandra Garg, had recommended a complete ban on the crypto trade in 2019.
India and Cryptocurrency adoption
According to the 2021 Global Crypto Adoption Index, India ranks second among 154 countries in global cryptocurrency adoption. Worldwide crypto adoption grew by 881% in the last year. Further, global adoption has grown by 2300% since the third quarter of 2019.
Crypto regulations and confusions
The government has already amended the company law and asked companies to disclose crypto-related transactions.
There is a lot of uncertainty about how to regulate and tax crypto assets, both in terms of income tax and goods and services tax (GST). It is still unclear if cryptocurrency is a currency, a commodity, or equity. The upcoming bill is expected to answer all these questions.
The government’s move to categorize cryptocurrencies according to their use cases will assist to accelerate the adoption of digital coins in the country, which is already gaining traction.