Trading in Cryptocurrencies from a Company perspective – 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,
- No expenses or any other deduction will be allowed except the cost of acquisition.
- 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.
