Cryptocurrency and Taxation Challenges

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Cryptocurrencies have been in the news lately because tax authorities believe they can be used to launder money and evade taxes. Even the Supreme Court appointed a special investigative team to investigate illicit money and recommended that it be discouraged to trade in such currencies. While China has reportedly banned some of its largest Bitcoin trading operators, countries like the US and Canada have laws restricting stock trading in cryptocurrencies.

What is cryptocurrency?

Cryptocurrency, as the name suggests, uses encrypted codes to carry out a transaction. These codes are recognized by other computers in the user community. Instead of using paper money, an online ledger is updated with normal bookkeeping entries. This currency is debited from the buyer’s account and credited to the seller’s account.

How are transactions with cryptocurrency carried out?

When a transaction is initiated by a user, their 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 appends a code to a block of several such encrypted codes known to every user on the network. Special users called “miners” can attach the additional code to the publicly shared block by solving a cryptographic puzzle and earning more cryptocurrency in the process. As soon as a miner confirms a transaction, the record in the block can no longer be changed or deleted.

For example, BitCoin can also be used on mobile devices to make purchases. All you have to do is have the recipient scan a QR code from an app on your smartphone or bring them face to face using Near Field Communication (NFC). Note that this is very similar to normal online wallets like PayTM or MobiQuick.

Die-hard users swear by BitCoin for its decentralization, international acceptance, anonymity, durability of transactions and data security. Unlike paper currency, no central bank controls inflationary pressures on the cryptocurrency. Transaction books are stored on a peer-to-peer network. This means that every computer chip and its computing power and copies of databases are stored on every such node in the network. Banks, on the other hand, store transaction data in central repositories that are in the hands of private individuals who are commissioned by the company.

How can cryptocurrency be used for money laundering?

The mere fact that there is no control over cryptocurrency transactions by central banks or tax authorities means that transactions cannot always be assigned to a specific person. This means that we do not know whether the transactor legally acquired the store of value or not. The shop of the transaction is similarly suspect, as no one can say what consideration was paid for the currency received.

What does Indian law say about such virtual currencies?

Virtual currencies, or cryptocurrencies, are commonly viewed as software and are therefore classified as a commodity under the Sale of Goods Act of 1930.

Since it is a good, it would be subject to indirect taxes on its sale or purchase and GST on the services provided by miners.

There is still quite a bit of confusion as to whether cryptocurrencies are considered a currency in India and the RBI, which has clearing and payment systems as well as prepaid trading instruments, has certainly not authorized buying and selling through this medium of exchange.

All cryptocurrencies that a resident of India receives would thus be subject to the Foreign Exchange Management Act of 1999 as goods import into that country.

India has allowed BitCoins to be traded on special exchanges with built-in safeguards for tax evasion or money laundering activities and the enforcement of Know Your Customer norms. These exchanges include Zebpay, Unocoin, and Coinsecure.

Those who invest in BitCoins, for example, must be charged with the dividends received.

Capital gains from the sale of securities with virtual currencies are also taxable as income and the associated online filing of IT returns.

If your investments in this currency are large, it is better to seek advice from a personalized tax service. Online platforms have made the tax compliance process much easier.

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Source by Ranjeet Das