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Tax Talk: Clarity on tax for new age investments needed

The government also needs to decide that if income from cryptos is treated as business income, whether it should be categorised as a speculative or non-speculative transaction.

The CBDT vide Finance Act, 2013 brought about an amendment that trading in derivatives is not to be considered as a speculative transaction.
The CBDT vide Finance Act, 2013 brought about an amendment that trading in derivatives is not to be considered as a speculative transaction.

By Shailesh Kumar

While taxpayers seek tax relief from the government to endure pandemic stress and increase their disposable income, there are certain areas while determining taxability of new age investment options, more clarity is required under tax law.

The new age investment options, be it cryptocurrencies, or derivatives such as Futures & Options or Sovereign Gold Bonds, have all caught the attention of millennials and they look forward to making investments in these instruments, to see their investments multiply and beat the inflation effects. However, more clarity is required under income tax law, so that investors can be better informed about tax implications of such transactions and don’t have to face litigation with tax authorities later.

Taxation of cryptocurrencies

In the recent past, there was a buzz in the industry that altogether a new law was to be enacted to regulate the Crypto. It was also anticipated that necessary changes will be made in income tax provisions, and define categorisation of ‘cryptos’ as ‘capital asset’ or ‘business asset’ or ‘currency in the hands of investor’. However, no such legislative provisions have been made so far. Accordingly, there is no clarity on whether income/ loss from sale of cryptos should be treated as ‘capital gain/ loss’ or ‘business profit’?

The government also needs to decide that if income from cryptos is treated as business income, whether it should be categorised as a speculative or non-speculative transaction, since it will directly impact whether crypto losses may be set off against other business income or not.

Taxation of futures & options

The CBDT vide Finance Act, 2013 brought about an amendment that trading in derivatives is not to be considered as a speculative transaction. Accordingly, losses from trading derivatives could be carried forward for eight years, unlike four years in the case of speculative business income. Even though the law is amply clear about the head of income for taxability of income from such derivatives, there is a lot of ambiguity amongst taxpayers with regards to maintenance of books of accounts in such cases.

Lot of individual taxpayers make investment in futures & options and derivatives, who need clarity on requirements to maintain books of accounts and to get the same audited. This clarity is needed especially in case of small traders, who have incurred losses in derivatives, and want to claim losses so incurred, but do not want to undergo the compliance burden of maintaining books of accounts or getting them audited. Considering the increase in the number of investors under this mode, we expect the government to come up with some specific guidelines in this regard.

Capital gains from SGB

As an alternative to holding gold in physical form, the Sovereign Gold Bond Scheme was rolled out by the government. The current provisions of the Act exempt capital gains from redemption of Sovereign Gold Bond issued by RBI under the Sovereign Gold Bond Scheme, 2015. While the intention of the law has always been to exempt capital gains arising on redemption of such Sovereign Gold Bond schemes. However, in order to avoid any future litigation and to remove ambiguity in law, appropriate amendments should be made in the law, providing capital gains exemption for each issue of Sovereign Gold Bond Schemes.

The writer is partner, Nangia & Co LLP. Inputs from Mayank Khaneja, senior associate

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