Cryptocurrency and Taxation Challenges

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Cryptocurrencies recently grabbed the headlines because tax authorities believe they can be used to launder money and evade taxes. Even the Supreme Court appointed a special black money investigation team recommended that trading in such currency be discouraged. While China has reportedly banned some of its biggest Bitcoin trading operators, countries like the United States and Canada have laws in place to restrict trading in cryptocurrency stocks.

What is cryptocurrency?

Cryptocurrency, as the name suggests, uses encrypted codes to complete a transaction. These codes are recognized by other computers in the user community. Instead of using paper money, an online ledger is maintained with regular ledger entries. The buyer's account is debited and the seller's account is credited with this currency.

How are cryptocurrency transactions carried out?

When a transaction is initiated by a user, their computer sends a public encryption or a public key that interacts with the private encryption of the person receiving the currency. If the receiver accepts the transaction, the initiating computer attaches a piece of code to a block of several of these encrypted codes that is known to every user on the network. Special users called 'minors' can attach the extra code to the publicly shared block by solving a crypto puzzle and earn more cryptocurrency in the process. Once a miner confirms a transaction, the record in the block cannot be edited or deleted.

BitCoin, for example, can also be used on mobile devices to make purchases. All you have to do is let the receiver scan a QR code from an app on your smartphone or put it face to face using near field communication (NFC). Note that this is very similar to regular online wallets such as PayTM or MobiQuick.

Die-hard users swear by BitCoin for its decentralized nature, international acceptance, anonymity, permanence of transactions, and data security. Unlike paper money, no central bank controls the inflationary pressures on cryptocurrency. The transaction logs are stored in a Peer-to-Peer network. This means that each computer chip in its computing power and database copies are stored on each of these network nodes. Banks, on the other hand, store transaction data in central repositories that are in the hands of individuals hired by the business.

How can cryptocurrency be used for money laundering?

The very fact that there is no control over cryptocurrency transactions by central banks or tax authorities means that transactions cannot always be associated with a particular person. This means that we do not know whether the trader obtained the store of value legally or not. The store of the transaction is also suspect, as no one can tell what consideration was given to the currency received.

What does Indian law say about these virtual currencies?

Virtual currencies or cryptocurrencies are generally considered to be software and are therefore classified as good under the Sale of Goods Act, 1930.

In the case of a good, indirect taxes on their sale or purchase as well as GST on services provided by minors would be applicable to them.

There is still a bit of confusion as to whether cryptocurrencies are valid as a currency in India and the RBI, which has authority over clearing and payment systems and prepaid negotiable instruments, does not. definitely not allowed buying and selling through this medium of exchange.

Any cryptocurrency received by a resident in India would therefore be governed by the Foreign Exchange Management Act, 1999 as an import of goods into that country.

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

Those who invest in BitCoins, for example, are likely to be charged on dividends received.

Capital gains received due to the sale of securities involving virtual currencies are also subject to tax as income and therefore the online filing of computer returns.

If your investments in this currency are large, you better get help from a personalized tax service. Online platforms have made the tax compliance process much easier.


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