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A Guide to Crypto Taxation and Investment

Crypto investments have had a wild journey. The market corrections in May 2021 and the bullish market for BTC have shown the world how enormous and capable the cryptoverse is! With the mass adoption of the newest asset class, the Indian audience has also experienced a lot of questions regarding the taxation and regulation within the cryptocurrency ecosystem especially after the Monsoon Budget Session of 2021.
To understand the taxation and investments in cryptocurrency better, India’s first crypto unicorn CoinDCX joined hands with ClearTax. Let’s take a walk-through of the session, shall we?

Blockchain and Taxation: Potential usage by authorities

Blockchain is a digital ledger wherein transactions of valuable information are done without any risk of tampering. It is a specific type of database that stores data in blocks which are then chained up together. The new data is then entered into a fresh block. Once the block is filled with data, it gets tied up to the previous block creating a chronological order for the data. The same can be used by taxation authorities in many forms:

Collection of taxes and tax filing process 

Smart contracts are self-executory i.e. they are stored on a blockchain and run on predetermined conditions. The execution of transactions happens based on the conditions agreed upon by the parties involved. Governments and other regulatory agencies can program smart contracts to act in accordance with state taxation laws. These automated contracts can be programmed with multiple clauses to offer all the possible benefits to entities in the form of tax avoidance and collect revenue as dictated by the taxation laws that are in effect in that period.

Collection and analysis of information 

Collection of information relevant to tax authorities from the members of the general public or corporations can be done on a platform that uses blockchain technology. This would ensure the submission and analysis of the authentic documents.

Help in checking the veracity of information shared and in maintaining the Audit trail 

The security measures embedded within the technology give the tax authorities and other regulators more confidence in the authenticity of the data supplied to them. The usage of blockchain technology also facilitates tracking where and when taxes have been paid, resulting in reduced taxes fraud.

Application of Blockchain in Governance

Blockchain being a digital ledger, where the transactions take place across the network of participating computers (nodes), abolishes a centralized authority and relies on decentralization. No single authority has control over the data and transactions. Blockchains may be public wherein all the nodes would have access to the data or it may be private where only certain authorized nodes would have access to the data points.

Use of Blockchain in Governance

Use of Blockchain in voting: Blockchains can be incorporated into the voting architecture from the stage of electoral registration to collecting and counting the votes. The idea of adapting digital voting systems is to make the public electoral process cheaper, faster, and easier.
Use of Blockchain for property registration: The Karnataka state government is developing a system based on blockchain technology for online property documentation. Each property holder will be given a property card similar to an ATM card, which can be accessed through a PIN. The card will be acting as a locker, storing all the property transaction details. This ensures the protection of the property data besides removing the hassle of storing hard copies of all documents.

The Estonian government uses a decentralized system for providing public notary facilities for its citizens. Citizens only need to put in their personal information once. Using the blockchain system, the relevant data can immediately be accessed by the required public authority. 

In India, Tata Consultancy Services (TCS), a leading global IT service, consulting, and business solutions organization, has come up with a technology to build blockchain networks and issue smart contracts. It is designed to help Market Infrastructure Institutions (MIIs) such as exchanges, depositories, central banks, payment infrastructures, private banks, custodians, and issuers, offer end-to-end next-generation services around tokenized securities, and drive their future growth. This could probably be the first step towards the adoption of blockchain technology by India.

Different ways to invest or trade in crypto

Note: CoinDCX believes in investors making informed investment decisions. It is advisable to conduct your own research before diving into investing. 

Measures taken by CoinDCX being the Safest & Complaint Exchange

How is CoinDCX helping people prevent from losing their funds

How much should a person know before investing?

To clear all your doubts here, CoinDCX has DCX Learn. Learn all about blockchain, distributed ledger, tokens, and the problems it is solving. We gather our liquidities from big exchanges like Binance. Users must know what token they are investing in. They must know the valid utility of these protocols. We suggest you read about the project and learn through our platform about those projects and you will start seeing returns in a futuristic manner.

FAQs on Crypto Taxation 

Do I need to inform the ITR department whenever I make profits in crypto? If yes, what is the procedure for it?

As of now, there are no specific guidelines or provisions on taxation of cryptocurrencies in the Income Tax Act, 1961 (the Act or IT Act); however, one could draw inference from the general principles of taxation and tax the transactions based on the purpose for which they are used and report the gains or losses in the income tax return (ITR). The procedure for assessment and filing of the return would be the same as currently prescribed for all income and gains under the Income Tax Act, 1961. 

Will I be taxed if I sell crypto and do not encash (still in DCX wallet)?

Yes, any income generated through buying or selling needs to be highlighted in ITR. As a matter of fact, the Ministry of Corporate Affairs (MCA) vide its Notification dated March 24, 2021, has made it mandatory for Companies, which have invested or traded in Cryptocurrency or Virtual Currency during any Financial Year, to disclose the following:

Can CoinDCX help me with creating a taxation statement for the ITR process?

CoinDCX application provides its users with a Profit and Loss dashboard wherein the notional gains and losses (calculated on a real-time basis) are visible to the users. This enables the user to provide the necessary declaration when filing the return and also assess any tax liability.

I am still confused about how to tax my crypto. Can you help?

Yes, absolutely. We receive a lot of queries from users on this front. Before understanding digital asset transactions and tax implications thereon, it is important to first understand whether such transactions fall under the purview of the IT Act, 1961.
Sale and Purchase of digital assets as stock in trade
Section 2(13) of the IT Act defines the business in an inclusive manner. It states that “trade, commerce or manufacture or any adventure or concern of any nature”. Therefore, any continuous activity like trading in cryptocurrencies will get included in this definition and any profits realized therein shall be taxed under Section 28 of the Income Tax Act. To elaborate on this, if a person is engaging in trading of cryptocurrencies on a day-to-day basis and/or if the said trading activity can be qualified as the primary occupation of such person, the income generated by such person may be qualified as Income from business for the purpose of classification of income generated from trading in cryptocurrencies.
Dealing in digital assets for the purpose of investments
Section 2(14) of the IT Act that defines Capital Assets is widest in itself and covers all kinds of property whether tangible and intangible except those expressly excluded under the Act. It states that a capital asset is a “property of any kind held by the assessee whether or not connected with his business or profession”. The term property, though has no statutory meaning, yet signifies every possible interest which a person can acquire, hold or enjoy. Therefore, any gains arising out of the transfer of cryptocurrency may be considered as capital gains, if they are held for investment.
Further, Section 45 of the IT Act provides that any profits and gains derived from the transfer of a ‘capital asset’ during any previous year shall be chargeable to income tax as ‘capital gains in the hands of the transferor and shall be deemed to be the income of the previous year in which the transfer took place. Thus, such gains arising out of the transfer of cryptocurrency may be taxable.
Income from other sources
As per section 56(1) of the IT Act, 1961, any income which is not exempt and which cannot be classified under any heads of income, shall be liable to tax under “Income from other sources”. This means any income which is not exempt from taxation will be taxed as per the relevant provisions mentioned in the IT Act.

Will CoinDCX provide me with tax-related documents next year for filing ITR?

The Profit and Loss dashboard on the CoinDCX application enables the user to assess potential gains/losses and the percentage of returns. This feature on the CoinDCX application actually enables the user to provide or declare necessary information related to his/her cryptocurrency investments thereby enabling the user to also calculate any potential tax liability.

I’m a student, do I have to pay taxes on my crypto assets?

Irrespective of whether you are a student or not, general rules under the Income Tax Act shall apply. Unless explicitly exempted under the Income Tax Act, income generated would be taxed as per relevant rates mentioned therein.

Are the profits in my CoinDCX INR wallet taxable or is it only taxable when I withdraw it to the bank?

Yes, the profits in your CoinDCX INR wallet is taxable, and it is immaterial if you have kept it in your wallet or in a Bank Account. 

Is crypto profit taxed? If yes, how much tax is to be paid?

Yes, transactions in cryptocurrency can attract taxation as per the situations contemplated earlier in terms of above mentioned applicable provisions of the IT Act. The calculation of tax would depend upon the classification of the gains/losses under the respective prescribed heads of Income under the IT Act.

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