By Promod Batra
Tax authorities have been taxing crypto transactions either on the basis of existing tax legislation or by relying upon specifically enacted laws or guidance (wherever available). Here we examine the tax treatment India has adopted vis-a-vis three developed A-Pac jurisdictions.
India enacted provisions for taxation of income from Virtual Digital Assets (VDAs), which, inter alia, include cryptocurrencies and Non-Fungible Tokens (NFTs), to tax gains at 30%. The law also provides that in computing such gains, only the cost of acquisition shall be allowed as deductible. Further, loss on transfer of a VDA has been made ineligible for set-off against income and such loss cannot be carried forward for set-off in future years. Gift of VDAs exceeding `50,000 have also been made taxable.
The government, to prevent tax leakages, has also introduced a 1% withholding tax obligation on the buyer of a VDA. Recent guidelines issued by the Central Board of Direct Taxes inter alia fix the primary responsibility to withold tax on the buyer, with the provision that the exchange my take steps to ensure tax withholding compliance where there is a written agreement to this effect between the buyer/seller and the exchange.
On the GST front, GST authorities are seemingly considering whether to characterise cryptocurrencies/NFTs as goods, services or actionable claims. This would be pivotal in determining the applicable rate of GST with the peak rate of 28% being applicable to supply of actionable claims such as lotteries. Another question relates to determining ‘supplier’ as well as ‘place of supply’ of cryptos supplied in the Metaverse.
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There is no crypto-specific tax legislation in Australia. However, the Australian Tax Office (ATO) has issued guidance on various crypto related income tax aspects. Tax consequences depend upon how a crypto asset is acquired, held, and disposed of. ATO guidance provides that gain on disposal of crypto assets held as investments (sale, exchange, swap, gift, conversion into fiat currency, etc.) gives rise to capital gains tax. As an exception to this general rule, gains on disposal of ‘personal use’ crypto assets are not subject to capital gains tax implications. (However, such gains are taxable where personal use crypto assets are acquired for more than 10,000 AUDs). ATO guidance also provides that gains/rewards arising out of crypto-staking as well as value of crypto tokens acquired through airdrops are taxable as ordinary income on revenue account, with the same applying to business enterprises transacting in crypto assets. . ATO guidance takes due recognition of the fact that crypto assets can be stolen or lost due to a multitude of circumstances such as loss of a private key. In such cases, the taxpayer is eligible to claim capital loss. ATO also provides GST guidance for transactions in ‘digital currencies’ and designates these as ‘financial supplies’ not subject to GST. ‘Digital currency’ excludes certain digital units which entitle an exchange for goods or services in future or units which derive value from something else, for instance, NFTs backed by tangible assets.
Singapore follows a territorial tax system whereby only Singaporesourced income is taxable. The nation also does not tax capital gains, and there is no crypto-specific income tax legislation. Therefore, corporates and individuals holding cryptocurrencies for long-term investment objectives are not subject to taxes. Corporates earning income from transactions in cryptocurrencies are taxed thereon provided the income is sourced in Singapore.
The IRAS e-Tax Guide on income tax treatment of digital tokens provides for classification of crypto assets/tokens as payment tokens, utility tokens or security tokens. Payment tokens are viewed as intangible assets and transactions therein are viewed as barter requiring valuation of goods/services for computing taxable income or deductible expense. Unrealised gains/losses in value of payment tokens carry no tax impact.
Acquisition cost of utility token (to be exchanged for goods/services in future) is treated as prepayment and allowed as a deduction at the time of exchange. Security tokens i.e., tokenised form of securities/investment assets/instruments are taxed based on nature, rights, and obligations tied thereto.
IRAS e-Tax Guide GST1 provides guidance on GST implications for transactions in digital payment tokens (‘DPT’). DPTs include cryptocurrencies but typically exclude utility tokens and supplies of DPTs are not subject to GST. It has also been clarified that the transfer of NFTs constitutes taxable supply of services.
Hong Kong levies tax on income sourced in Hong Kong. The Departmental Interpretation and Practice Notes No. 39 (Revised) issued by the Inland Revenue Department provides for categorisation of crypto assets into payment tokens, utility tokens and security tokens. Frequent trading of cryptocurrencies in the “regular course of business” is considered income, subject to Hong Kong income tax.
The tax challenges arising from the digital economy (aimed to be solved by OECD Pillar 1) are set to increase exponentially. Guidance provided by Australia and Singapore reflects a broad consensus around integration of cryptocurrencies and blockchain-based businesses into the mainstream. India. on the other hand, has enacted strict provisions generally perceived to be deterrent to cryptocurrency transactions. One must not forget that tax certainty and a liberal compliance regime go a long way in ensuring tax compliance and hence, future tax laws must be framed accordingly.
The author is Partner, Deloitte India