BEWARE: Tax terrorism by the taxman, Do you manage your crypto?

[amishmanish]

Hey guys. I was looking at a post in global about how IRS in USA is making people cough up tax liabilities on their crypto gains. Following up on the comments, someone shared a link to a student on Reddit who had an "unrealized" profit of almost 800K in his coinbase account. That 800K was the "USD Value" of his portfolio on coinbase and he never really cashed out. All he did was juggle it into other Alts.
Later on he gets called by the taxman on the basis of a history of his trades on Coinbase (each of which is a taxable event) and he ends up owing almost 400K as tax while the value of his "portfolio" at present is 125K.

With the opening up of exchanges in India and WazirX. DCX etc actively encouraging people to dabble into Alts, the probability of people ending up in the same situation has increased greatly. So, if you or anybody you know is dabbling into Alts and doing the fancy "Futures and Options" trading on these exchanges, make sure you manage your crypto to set aside what you owe as tax during every trade. (It wouldn't be much but it adds up i guess).

I also want some advice from you guys regarding the earnings in BTC. Would it be considered a taxable event when an entity sends BTC to your account? It has some notional INR value, right. I don't convert my sats ever. I just let them sit. Its only been for my present campaign that i have been in one for so long. I wonder what are the implications related to tax when you are not converting it to Fiat and just receiving it. Do share if you guys have prior experience about this.

[webtricks]

Now this is interesting. This issue arises due to complex nature of cryptocurrencies. Government itself is unclear about the status of cryptocurrencies so it would be hard to guess whether any gain arises out of transfer between cryptocurrencies is subject to tax or not.

Let's see the easy case first i.e. Capital Gains. You buy X cryptocurrency with INR then buy Y cryptocurrency by selling X at profit. So is the profit on the sale of X taxable? Well, as per Income Tax Act, it should! You have already closed your investment in X so it should be viewed as separate taxable event than the buying of Y. But non-withdrawal of money to the bank makes the situation tricky here. So to be at the safer side, it's better to clear taxes on all capital gains at the end of year no matter you withdrawn the profit into bank or bought other coins with it. I have written about this particular situation in details here: https://bitcointalk.org/index.php?topic=5206607.msg54447056#msg54447056

Now comes the main issue:

I also want some advice from you guys regarding the earnings in BTC. Would it be considered a taxable event when an entity sends BTC to your account? It has some notional INR value, right. I don't convert my sats ever. I just let them sit. Its only been for my present campaign that i have been in one for so long. I wonder what are the implications related to tax when you are not converting it to Fiat and just receiving it. Do share if you guys have prior experience about this.

A situation may arise when you receive cryptocurrency on the address which could be linked to your real identity and you don't realize such cryptocurrency in fiat. There is a chance that authority may go to the high degree of investigation and question you about it but it is difficult to ascertain true taxes on such transaction even if your willing because you don't have exact conversion rate for such amount unlike trading.

In my knowledge, I won't pay tax on such income because how I view it is like 'Law of Differentiation'. Suppose we are differentiating y = log (sin x) with respect to x as per first principle. So to solve the equation, you have to assume sin x as u hence final equation will be:

 dy/dx = d(log u)/du * d(sin x)/dx    where y = log u and u = sin x

Similarly when it comes to dealing with crypto transactions and fiat transactions, I view crypto transactions as u and fiat transactions as y. Just like you can't directly differentiate log u with respect to x and you have to differentiate it separately with respect to du first and then dx. Similarly, you can't estimate taxes on cryptocurrencies unless you withdraw them to bank (i.e. realize them in fiat).

Hence, NO! You shouldn't be paying taxes on any income which you have received in crypto and haven't realized in fiat money yet. But just to be safe, try to receive such payments on address which can't be linked to your real identity and transfer those to your exchange address only when you intend to sell.

[amishmanish]

Thanks for the detailed reply webtricks. So, in short, all kind of crypto to crypto transactions will also be taxable and those trading on platforms like WRX, CoinDCX must make sure that they keep a record of all their transactions and resulting capital gains from it.
It would be interesting to follow such a case. From what i have heard the US traders say, they seem to diligently maintain a ledger with all transactions and accordingly file their returns at the end of the year. This is a hurdle in the proliferation of crypto transaction in India and similar countries. The Indian taxmen see it with suspicion. The Govt is pretty belligerent and aggressive towards collecting its "dues". These two factors combine to ensure that despite the removal of ban, the big fish (if any) would be unwilling to use crypto in real-world transactions.

For the part about direct BTC earnings, i think this implies that it is best to show those returns as some sort of earning on the tax return and pay the INR equivalent tax on the prevalent rate. Income from other sources like freelancing work maybe.

[hugeblack]

I don’t know how taxes work in the United States, but the example that has been mentioned does not seem correct. There are a lot of programs that calculate taxes on the Coinbase website, so you can use them to confirm your tax situation.

Also, I believe that the user in the example above is obliged to pay 40,000 dollars due to profits of 125,000 dollars.

As @webtricks mentioned, the easiest way to do this is to buy Bitcoin using INR bank account, trade away from proof of identity "either here or use Binance less than 2 BTC daily trading,"
After making a profit, transfer the full amount to Bitcoin and withdraw profits to the bank (pay the tax once.)

[webtricks]

For the part about direct BTC earnings, i think this implies that it is best to show those returns as some sort of earning on the tax return and pay the INR equivalent tax on the prevalent rate. Income from other sources like freelancing work maybe.

I still think paying tax on such holdings in not justifiable. Why should I pay taxes if I am still holding an asset? It is clear that Bitcoin is considered as capital investment for the calculation of tax. So going by that definition, receiving payment in cryptocurrencies can be considered equivalent to "receiving asset in lieu of cash payment". When a person receives income by the way of capital asset, he is not subject to pay taxes right away. Tax event arises only when he sells the asset.

Let's understand this with the help of example:

Suppose I provided a social media service to XYZ Ltd. for the fees of $300 in 2017. But instead of paying $300 in cash, XYZ Ltd. gave me gold coins worth $300. I didn't sell those coins for another year and then sold those for $450 in 2018-19 and received payment in my bank account. Now, even though the income of $300 belongs to the previous year 2017-18 but still tax liability for such income will arise in 2018-19 when I actually realize the asset i.e. gold coins.

Now let's consider Bitcoin payments in similar situation. I received $300 as my signature earnings in Bitcoin on 31st Jan, 2020. But I sold it on 15th June,2020 for $400 due to increase in bitcoin price. Hence, tax on such income shall be payable in previous year 2019-20 and not in 2018-19 when I actually received the payment.

Another interesting concept arises here. People may ask whether the whole $400 shall be considered as Income from Other Sources? Well, actually no! $300 is your income from other source but $100 ($400-300) is your short term capital gain. But since tax on STCG is charged at the same rate as other source income, there will be no effect on the amount of net tax payable.

Long story short, don't pay tax if you are holding any payment in Bitcoin. Pay only when you sell such payment in INR because:
-> You may overpay/underpay tax due to the difference in the prevalent rate on the date of actual sale and the date considered for the purpose of taxation.
-> There will no receipt transaction in your bank account which will attract unnecessary attention from Income Tax Department.

[teosanru]

Okay So I will have to reply this in two posts or else one post will be hell too long for anyone to read.
But let's bear in mind couple of things:
1. Until last year govt. hasn't clarified what crypto is but now after the Supreme Court Judgement it has recognized that RBI defined VC as: "as a type of unregulated digital money, issued and controlled by its developers and used and accepted by the members of a specific virtual community”.
2. USA has a separate Tax Laws and what takes place in USA doesn't necessarily would happen here.
My Answer would be based on existing Laws of Income Tax
So first Coming to the issue raised by AmishNamish:

Hey guys. I was looking at a post in global about how IRS in USA is making people cough up tax liabilities on their crypto gains. Following up on the comments, someone shared a link to a student on Reddit who had an "unrealized" profit of almost 800K in his coinbase account. That 800K was the "USD Value" of his portfolio on coinbase and he never really cashed out. All he did was juggle it into other Alts.
Later on he gets called by the taxman on the basis of a history of his trades on Coinbase (each of which is a taxable event) and he ends up owing almost 400K as tax while the value of his "portfolio" at present is 125K.

With the opening up of exchanges in India and WazirX. DCX etc actively encouraging people to dabble into Alts, the probability of people ending up in the same situation has increased greatly. So, if you or anybody you know is dabbling into Alts and doing the fancy "Futures and Options" trading on these exchanges, make sure you manage your crypto to set aside what you owe as tax during every trade. (It wouldn't be much but it adds up i guess).

USA Taxman were absolutely right in doing so. however it leaves me surprised that Tax ended up more than the Present Portfolio it might be because of Interests and Penalty. Coming to the Indian Income Tax Act, 1961. Now when Crypto have got definition of unregulated digital "Money". Therefore it would be easily coming in purview of Capital Gain. Which means if you are buying and selling some cryptocurrencies for other cryptocurrencies you will have to Pay Capital Gain. I take this from Section 2(14) where Capital asset is defined as:
"(i)Property of any kind held by an assessee."
Now digital money can easily come under this definition therefore would be liable to Capital Gains Tax.
Then comes the second issue. If there is non withdrawal of money how can it be taxable? Well this brings us to Section 50D. which states that:

"Where the consideration received or accruing as a result of transfer of Capital Asset by an assessee is not ascertainable or cannot be determined, then , for the purpose of Computing income chargeable to Tax on Capital Gains, Fair market value of the said asset on date of transfer shall be deemed to be the full value of consideration received."

For Example: if you have 1 BTC and using that 1 BTC you buy 50 ETH . Now, in you will be charged Capital Gain on the Fair Market Value of 50 ETH. It's because you have exchanged an asset. Your sales consideration would be 50 ETH's INR Price on date of transfer. and purchase Cost would be 1 BTC's purchase price when you purchased it.

Therefore, you just cannot barter your way out of Income Tax Act. So, If Indian tax authorities went to check records of all the exchanges then you might have to pay tax on all this Income along with Interest & Penalty for Mis-Reporting of Income. So I prefer now it's better to declare such gains in your Income Tax Return by keeping a track of all your trades. You can get a trade log from your exchange. For Traders: As I said earlier in a post declare Business Income but it would be speculation business.

Now this is interesting. This issue arises due to complex nature of cryptocurrencies. Government itself is unclear about the status of cryptocurrencies so it would be hard to guess whether any gain arises out of transfer between cryptocurrencies is subject to tax or not.

Let's see the easy case first i.e. Capital Gains. You buy X cryptocurrency with INR then buy Y cryptocurrency by selling X at profit. So is the profit on the sale of X taxable? Well, as per Income Tax Act, it should! You have already closed your investment in X so it should be viewed as separate taxable event than the buying of Y. But non-withdrawal of money to the bank makes the situation tricky here. So to be at the safer side, it's better to clear taxes on all capital gains at the end of year no matter you withdrawn the profit into bank or bought other coins with it. I have written about this particular situation in details here: https://bitcointalk.org/index.php?topic=5206607.msg54447056#msg54447056

So if we go into Section 50D of Chapter Capital Gains it's not at all tricky if you look at it. FMV can be easily obtained from that Exchange itself.

[amishmanish]

Thanks for the detailed reply Teosanru. Does that section 50D also cover the transfer of bitcoin as an asset transfer. For example, even if you transfer to an exchange for INR conversion, won't there be a tax liability on the source of the BTC itself.

I understand that people are suggesting about keeping such things untied to identity but every in-bound BTC transaction on an exchange is also an event in itself. I guess, for the purpose of taxation, the value of BTC on the day of inbound transfer into your exchange wallet may also be considered taxable. The taxman is always obsessed with "Source of Income".

[snowpa]

So as of now is there any structured format to refer for the crypto tax payment?

I had some crypto transactions in the year 2018. I received it as payment for the services that I provided

here in the forum and I have proof for it . Will I have to pay tax for all those income.? I think I had payed tax for it

but not as crypto tax .

[teosanru]

Thanks for the detailed reply Teosanru. Does that section 50D also cover the transfer of bitcoin as an asset transfer. For example, even if you transfer to an exchange for INR conversion, won't there be a tax liability on the source of the BTC itself.

I understand that people are suggesting about keeping such things untied to identity but every in-bound BTC transaction on an exchange is also an event in itself. I guess, for the purpose of taxation, the value of BTC on the day of inbound transfer into your exchange wallet may also be considered taxable. The taxman is always obsessed with "Source of Income".

No section simply transfer of Bitcoin would be covered under Capital gains as the sales consideration is easily determinable in that scenario. 50D is for calculating Sales Consideration in certain scenario if it's not clear in the transaction. When you receive an inbound transaction of BTC then it's better to directly check the source of that Income. Attribute the correct source and then note the Value on that date. Because if some signature campaign provider paid you xxx btc he might be having certain dollar amount in mind. So better take INR value of BTC on the date you receive it and show it as your income.

So as of now is there any structured format to refer for the crypto tax payment?

I had some crypto transactions in the year 2018. I received it as payment for the services that I provided

here in the forum and I have proof for it . Will I have to pay tax for all those income.? I think I had payed tax for it

but not as crypto tax .

No there is not set structured format for crypto tax but this doesn't means you don't have to pay tax on it. Tax would be leviable under normal provisions of the Income Tax act only the consideration conversion to INR is what you have to do by yourself.

Remember all these guidelines are advises and opinions based on current legal structure. So it might be possible that if you hide this income you might never be caught. But remember if you are caught there are tons of Interest, Penalties and prosecutions depending upon the amount. Moreover our government can bring any retrospective amendment on it.

[libert19]

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No section simply transfer of Bitcoin would be covered under Capital gains as the sales consideration is easily determinable in that scenario. 50D is for calculating Sales Consideration in certain scenario if it's not clear in the transaction. When you receive an inbound transaction of BTC then it's better to directly check the source of that Income. Attribute the correct source and then note the Value on that date. Because if some signature campaign provider paid you xxx btc he might be having certain dollar amount in mind. So better take INR value of BTC on the date you receive it and show it as your income.

Suppose, you did some work and when you received the BTC it's value was 1 lac, and when you actually sold it was 3 lac. So how do you pay on it? Is it under capital gains or in business income?

[teosanru]

~

No section simply transfer of Bitcoin would be covered under Capital gains as the sales consideration is easily determinable in that scenario. 50D is for calculating Sales Consideration in certain scenario if it's not clear in the transaction. When you receive an inbound transaction of BTC then it's better to directly check the source of that Income. Attribute the correct source and then note the Value on that date. Because if some signature campaign provider paid you xxx btc he might be having certain dollar amount in mind. So better take INR value of BTC on the date you receive it and show it as your income.

Suppose, you did some work and when you received the BTC it's value was 1 lac, and when you actually sold it was 3 lac. So how do you pay on it? Is it under capital gains or in business income?

Once again Disclaimer is that there is no clarity in law so I am going by the existing provision. Webtricks rightly pointed here that one way could be take 1 lac as a income from other source and declare it when you earn it and when you actually sell it 3 lac - 1 lac will become your capital gains. This seems the most legible option in my mind.

Go for declaring the income as business income on basis of FMV of BTC on day you receive it on basis of section 28(via) at 1 lakh(Pay tax in year your earned such income not when you sold it for rupees).

When you sell your bitcoin later on for 3 lakhs. Take the Cost of acquisition as 1 lakhs on the basis of section 49(9). Declare this as capital gain.

I am writing appropriate sections so that you can communicate the same to your CA when you seek representation. Alternatively you can PM me if you want my representation in your return.