Trading in Cryptocurrencies from a Company perspective

posted on May 30, 2024

Direct Tax implications

There are much more hypes and talks about cryptocurrencies which is also called as the virtual digital currencies. Some countries are favouring it, calling it a revolution in global economy and the other (like India) are not finding it appropriate.
Nevertheless, everyone is interested in cryptos especially the Gen-Z. They believe in the highest of the modernity, cryptos are the future. Here we come up with an article where we discuss whether a company can trade in cryptos in India and what are the direct tax implications in trading in Cryptos.

Brief introduction

Cryptocurrencies are digital or virtual currencies that use cryptography for security and operate on decentralized networks based on blockchain technology. Unlike traditional currencies issued by governments and central banks, cryptocurrencies function on a peer-to-peer network, allowing for direct transactions between users without the need for intermediaries.

Cryptocurrency trading has evolved into a dynamic and lucrative venture, attracting investors from all walks of life.

Cryptocurrencies in India have not been made legal yet neither it has been allowed as legal tender. RBI and Central Government has cleared the air that trading in cryptocurrencies will be at the investors or trader’s own risk.

Trading in Cryptocurrencies by incorporating a company in India
Any person including a Company can trade seamlessly in cryptocurrencies. As mentioned earlier, Government has not banned the trading in cryptos neither it has been made illegal. However, the Government yet to come up with the clear regulations on the same by introducing a parliamentary act.

So, a company may be incorporated with the objectives of trading in cryptocurrencies just like any other company whose objective is to trade in stock market, commodities or derivatives through an exchange.

To start trading in cryptos, the company needs to choose a reliable and compliant crypto exchange for example, WazirX, CoinDCX etc. Once a reliable and compliant exchange is chosen, the Company has to set up an account by providing its KYC information.

A crypto exchange is an online platform that facilitates the buying, selling, and trading of various cryptocurrencies. These exchanges serve as digital marketplaces where users can exchange their traditional currencies (like USD, EUR, or JPY) for cryptocurrencies (such as Bitcoin, Ethereum, or Ripple) or trade one cryptocurrency for another.

There are two types of exchange where a company can freely trade which are:

• Centralized Exchanges (CEX): These are traditional exchanges where users trust a third party, the exchange itself, to facilitate transactions. Examples include Binance, Coinbase, and Kraken.
• Decentralized Exchanges (DEX): DEXs operate without a central authority, allowing users to trade directly from their wallets using smart contracts. Examples include Uniswap and PancakeSwap.

After setting up the account on CEX or registering a wallet on DEX, the Company can start trading in cryptocurrencies available on the exchange.

These exchanges provide the facility to traders to deal in various cryptocurrencies globally. It is the most lucrative feature of cryptocurrency trading that it does not bother international borders. As we discussed earlier, under this decentralized system of trading, one need not to care about the bank’s interferences.

So, a company can freely buy or sell n number of cryptos from anywhere in the world.

RBI approval requirements 
Well, RBI does not recognize crypto as a legal tender neither as a financial asset, it is not worthy to even discuss about the RBI approval. The company can freely trade in cryptocurrencies through exchange which are compliant of law without any approval from RBI.

Income tax on trading in cryptos

• Tax rate: The Government has introduced section 115BBH of the Act in the Finance Act, 2022 and provides for taxation on income from the transfer of VDAs (i.e., Virtual Digital Assets which covers cryptocurrencies) at a flat rate of 30% whether it is held as an investment, business commodity, or in any other manner and whether it is held by a company or any other person.

It overrules all the other provisions of the law and also provides that from such income,

1. No expenses or any other deduction will be allowed except the cost of acquisition.
2. No set-off or carry forward of any loss from VDA shall be allowed.

• Tax on gifting the Cryptocurrencies: From April 1, 2022, the cryptocurrencies shall be treated as any other property as mentioned in Explanation to Section 56(2)(vii) of the Act. That means, now gifting cryptocurrencies shall also be taxable subject to some exception where the gift is being given to relatives or the value of cryptos gifted does not exceed fifty thousand rupees. 

• TDS:  A new Section 194S was inserted by the Government in Finance Act, 2022. With effect from July 1, 2022, any person responsible for paying to any resident any sum by way of consideration for transfer of a virtual digital asset, shall, at the time of credit of such sum to the account of the resident or at the time of payment of a such sum by any mode, whichever is earlier, deduct an amount equal to 1% of such sum as income-tax thereon.

Addressing common issues in taxing Cryptocurrencies

• Classification of income on transfer of cryptos under different heads of income: The tax rate on the income earned form the transfer of cryptos is flat 30%. Therefore, whether the income earned is of the nature of capital gain, business income or income under the head ‘Other Sources” does not alter the tax liability of a person.
  
  As we are discussing for the companies which has been incorporated with the objective of trading in cryptos, the income earned shall be considered under the head ‘PGBP’. However, this income shall be taxed at special rate which is 30% as per Section 115BBH of the Act.

• Allowability of common expenses related to composite/indivisible business of trading in cryptos and trading in stock market or likewise
  
  The common business expenses are entirely allowable against income from trading in other assets subject to the provisions of Income Tax Act as applicable on the companies.

• Allowance of expenses related to mining, validation, acquisition, or transfer of the cryptos 
  
  Only the expenses related to the acquisition are allowed to be deducted and no other expenses whether it is related to transfer, validation, or any other matter is allowed. However, the word ‘acquisition’ is not limited to only purchase price of the cryptos.
  
  It has greater meaning and should include all costs incurred during the mining phase of cryptocurrency generation. However, there is lack of clarity on this matter and a clarification from CBDT is expected very soon.

• Taxation of cryptos received as benefit or perquisite as part of employment 
  
  As per our view, the cryptos received by the employees of the company should be regarded as perquisite under Section 17(2) of the Act and should be regarded as salary income of such employee.

• Applicability of other provisions of the Act e.g. payment of advance tax, valuation of cryptos as stock-in-trade, FMV in case of transfer of cryptos against any other asset, provision related to transfer pricing etc.
  
  No new provision has been inserted or amended in the Act except for the Section 2(47A), definition of property under explanation to clause (vii) of Section 56 (2), Section 115BBH, and Section 194S. Due to absence of any specific provision on applicability of transaction related to cryptos, the normal provisions of the Act will prevail.

• Taxation of international transactions, DTAA and availability of Foreign Tax Credit
  
  There is yet no clarity in Indian Income Tax Act and in the provisions of DTAAs regarding foreign crypto transactions. Therefore, based on the nature of the transaction and the residency position, it can be said that the regular provision will apply to international and cross-border transactions.

• Tax treatment of cryptocurrencies received as business receipt from outside India
  
  Cryptos received as a consideration for the goods sold or services provided outside India shall be treated on par with receipt of money. Therefore, it shall be taxable in the hand of the recipient as a business income.
  
  Further the company after receiving the cryptos as a consideration will definitely put the same in a wallet of crypto exchange. Therefore, it shall be reported as investment in the books of account. As and when the same will be traded or sold, Section 115BBH and Section 194S of the Act shall be applicable.
  
  However, the Government is yet not clear on this issue and a clarification is sought from CBDT.

• Issues related to Deduction of Tax (‘TDS’)
  The CBDT has issued Notification No. 13/2022 and 14/2022 to resolve most of the concerns related to TDS on payment for transfer of cryptos under section 194S which clarify that:
  1. In case, the tax has been deducted under 194S, no TDS is required to be deducted under section 194Q and 194O of the Act.
  2. Tax is required to be withheld on the “net” consideration after excluding GST/charges.
  3. The payment gateways will not be required to deduct tax on a transaction, if the tax has been deducted by the person required to make deduction under the Act.
  4. Where the consideration is other than in kind:
     – In a peer to peer (i.e., direct buyer to seller – without involvement of any exchange) transaction – the buyer (i.e., person paying the consideration) is required to deduct tax.
     – If the transaction is taking place on or through an Exchange with involvement of broker or without broker – the broker/exchange (as the case may be) will be responsible for deducting TDS.