Bitcoins: Investors need to pay 20% advance tax on cryptocurrency earnings

At least 20% should be paid as advance tax on cryptocurrency earnings as that is the rate for long-term capital gains

In the midst of all the uncertainties around cryptocurrency, there is some clarity on at least one aspect. Investors, who have made a fortune selling the virtual currency, will need to pay 20 per cent advance tax on the earnings to avoid any action by the income tax (I-T) department.

“Since there is no clarity over whether cryptocurrency is a good, capital asset or business income, the tax department is not trying to distinguish. They are just saying, pay 20 per cent advance tax on money earned,” said Sathvik Vishwanath, founder of cryptocurrency exchange Unocoin.

The I-T department recently collected information of investors from some of these exchanges and sent out thousands of notices to those trading in bitcoin, ripple, ethereum, litecoin, among others. Among other questions, investors were asked if they had shown the gains made out of selling cryptocurrency as income in the annual tax returns filed for the current fiscal year and for the last two years.

“At least 20 per cent should be paid as advance tax on cryptocurrency earnings as that is the rate for long-term capital gains. The remaining (sum) can be paid at the time of filing annual return if the virtual currency was held for less than 24 months as short-term capital gains tax,” said an I-T official.

Advance tax means paying tax as and when the money is earned, rather than waiting for the end of the fiscal year. The four instalment dates of filing advance tax are 15th of June, September, December and March. 

So those who earned from selling bitcoin after December 15, will need to pay the 20 per cent advance tax by March 15. The long-term capital gains tax of 20 per cent is levied if the currency was held for more than 24 months and 30 per cent if held for less than two years as short-term capital gains tax.

The exchanges and investors are awaiting clarity from the government on how cryptocurrencies are to be treated. The government and the Reserve Bank of India (RBI) have, however, made it clear for now that it will not be treated as a currency. 

In the meantime, cryptocurrency exchanges eager to be part of the system have been kept guessing. For instance, in May 2016, the RBI told a prominent exchange Zebpay that "it may seek clarification from DGFT (Directorate General of Foreign Trade) as to whether bitcoins can be considered as goods or services. In case, the company intends to trade in bitcoins as a commodity, the said company may seek clarification from the Forwards Market Commission."

Later, in September 2016, the DGFT told Zebpay in a written response to seek a clarification from the Department of Financial Services.

Cryptocurrency exchanges, on their part, are taking precautionary measures to ensure tax compliance. “If you keep rupee (in an electronic wallet) with Zebpay, we make sure we pay that amount back to your account every quarter. So, we ensure that you declare the money in your books...forcing users to make the money as legitimate as possible,” Sandeep Goenka, co-founder of Zebpay, said.

Exchanges charging GST

Despite the regulatory vacuum, goods and services tax (GST) is part of the cryptocurrency universe. Exchanges are charging 18 per cent GST on the transaction fees that vary between 0.3 per cent and 2 per cent. This is in sync with I-T services, on which 18 per cent GST is charged.

“We charge 18 per cent GST on our transaction fees,” said Mohit Kalra, co-founder, Coinsecure, a cryptocurrency exchange platform.

Kalra said he was contacted by the GST department in Mumbai in October enquiring about how they were charging GST. “We gave them the details and the calculations of how we are charging GST. They were fine with it,” Kalra narrated.

The exchanges said cryptocurrency was unique in its characteristics and the government was yet to decide under which category to put it in. “It changes its form based on its use. It becomes a commodity or asset if you use it as an investment. It becomes currency if you are buying something against it...so I sympathise with the government,” Zebpay’s Goenka said. 

Vaibhav Parikh, partner, Nishith Desai Associates, pointed out that the applicability of the GST would accordingly depend upon how cryptocurrencies are characterised. “If you look at GST, there is no section on bitcoins. It falls under residual and is taxed at 18 per cent. If you view it under goods, then GST under that category will be applicable.”

He, however, said it’s more likely to be treated as goods more than anything else. 

Mandating quarterly audit report likely

The government may mandate the exchanges to file quarterly audit reports with the enforcement departments like I-T, RBI etc. “As long as exchanges are willing to provide quarterly data, there is no issue. Quarterly audits to these departments may become mandatory like in the case for banks,” said a government official.

The cryptocurrency industry has in its representation to the government recently asked for self-regulation, where it could file reports with the monitoring agency, which could be the payments regulatory board under the RBI.

In the absence of regulation, the banks are gradually closing accounts of crypto exchange platforms.

‘Banks can’t deny accounts’

N S Nappinai, an advocate with Supreme Court, argued that banks cannot deny opening of accounts and the matter can be taken to court. “Firstly, the banks can’t just generally say no to opening accounts. They will necessarily have to rely on specific RBI instructions to that effect. If the RBI has indeed instructions on opening or closing accounts, this issue can be agitated before a court of law. You can approach the court,” she pointed out. There are pending PILs before the Supreme Court already. And, according to Nappinai, courts are equally uncertain about the virtual currency universe.

Series concludes