New Delhi: Cryptocurrencies such as Bitcoin, Litecoin or Ethereum, which are issued by private players and stored in a decentralised form, are not pure currencies but they have traits of both an asset and a currency and they should be treated as such, said former finance secretary Subhash Chandra Garg.
Garg says for the taxation purpose, the government should clear the confusion about the nature of cryptocurrency, whether it should be treated as a commodity, which can be taxed under the GST framework or as an asset that will attract short-term and long term capital gains taxes.
Former finance secretary Subhash Chandra Garg, who headed the economic affairs department in the ministry of finance for two years, from July 2017 to July 2019, says the government will not be able to tax cryptocurrency if it is treated purely as a currency for making payments.
“As a currency, you don't earn income, so no need to tax it,” Garg told audience in the business and banking dialogue organised by Mumbai based fintech firm EPS India.
In response to a question by ETV Bharat, Garg said the problem arises when it is mixed up as an asset.
“Asset has an income issue. You buy Bitcoin at $10,000 and if you are able to sell it at $50,000, you made a profit of $40,000. This $40,000 profit must be taxed, it's an income,” the former bureaucrat told ETV Bharat.
Garg says the income earned on the sale and purchase of cryptocurrencies like Bitcoin and others is like any other income similar to an income from the sale or purchase of shares or real estate property such as a house, which may attract both short-term and long-term capital gains tax.
Journey of cryptocurrencies
The first and most popular private digital currency Bitcoin, launched by a group of people under the name of Satoshi Nakamoto, came into circulation in 2009. Since then, several other cryptocurrencies such as Litecoin (LTC), Ethereum (ETH), Cardano (ADA), Polkadot (DOT), Bitcoin Cash (BCH), and Stellar (XLM) among others.
According to an estimate by CoinMarketCap, there are over 8,500 cryptocurrencies with a market capitalisation of $1.45 trillion and they are traded on thousands of cryptocurrency exchanges.
However, Bitcoin (BTC) remains the most popular as its price rose from 30 cents in 2009 to over $58,300 on Sunday, an all-time high for the currency. It took the total market capitalisation of Bitcoins (BTS) over $1 trillion, which accounts for over 60% of the gross market capitalisation of all cryptocurrencies.
However, it tumbled from this high and was trading in the range of $45,000 to $48,000 on Tuesday.
Why it is difficult to ignore cryptocurrencies
In recent years, cryptocurrencies have become extremely popular. Early this year, the price of Bitcoin (BTC) skyrocketed when Tesla founder used #bitcoin hastag on his Twitter handle and announced that Tesla has invested $1.5 billion in Bitcoins.
Some charities, including UN bodies, have started accepting donations in cryptocurrencies. In countries such as the USA, UK, Canada, Germany, Australia, Cryptocurrencies find a favourable response and people can use them for making payments etc.
In the US, two top financial institutions, MasterCard and Bank of New Your Mellon, the oldest bank in the country, this month announced that they will deal in Bitcoins.
Swiss authorities have already announced that the companies and people based in the Swiss canton Zug will be able to pay taxes in Bitcoin (BTC) and Ethereum (ETH) from this month.
Cryptocurrencies in India
India's banking sector regulator, the RBI has been against the concept of private digital currencies. The Reserve Bank, through a circular dated April 6, 2018, had effectively declared cryptocurrencies illegal in the country.
However, the country's top court struck down the RBI circular in March last year, calling it unconstitutional.
The Supreme Court's decision in the Internet and Mobile Association of India (IAMAI) vs the Reserve Bank of India case brought the cryptocurrencies back in circulation in the country, the decision was hailed by India's crypto startups and investors.
Cryptocurrency bill to be tabled soon
Following the Supreme Court judgement, the Union government has decided to bring a bill in the Parliament to fill the legal vacuum surrounding the private digital currencies.
In an earlier interaction with ETV Bharat, Anurag Thakur, Minister of State for Finance, said the government has received reports of two high powered groups on the crypto-currencies and the report will be submitted to the Union cabinet soon.
“If the Cabinet approves it then the government may introduce a cryptocurrency bill in the current Parliament session to enact a law to regulate cryptocurrencies in the country,” Anurag Thakur had told ETV Bharat.
The minister, however, admitted that the issue was a challenge for several countries in the world which have been discussing how to deal with cryptocurrencies, whether to launch official digital currencies or allow private players to issue them.
Referring to the issue of imposing a tax on cryptocurrencies, the minister said, all these issues will be clarified in the bill.
Cryptocurrency asset or commodity!
Former finance secretary Subhash Chandra Garg says the government should sort out the confusion, whether to treat crypto as a commodity or as an asset.
Garg says cryptocurrencies are more like assets and not commodities.
“Commodities are consumed and assets are not consumed as such, assets deliver value over a period of time. The gains made on holding and trading the crypto assets should also be taxed,” the former bureaucrat observed.
Garg says commodities, which are manufactured and sold attract GST and also other kinds of things because they are part of the consumption system.
The crypto asset will not be part of the system, he said.
The former finance secretary says it is very clear that a cryptocurrency is an asset and it is listed and traded on exchanges that is why its issue is called initial coin offering.
“As you permit the issue of equity shares, you can also permit the issue of initial coins. Coins can be treated equivalent to equity and then these can be listed, made subject to all kind of regulations, making their trading possible,” he said.
“So I think if the government gets it, some kind of eligible crypto assets, allowed to be sort of listed and traded. Then tax implications will also be very simple. Today, you have long term capital gains, short term capital gains, likewise, you can have short term capital gains on crypto assets, long term crypto assets. You can also design a special regime, the kind of regime for taxing gold,” added the former bureaucrat.