by Anirudh Tyagi 3 May 2021
Cryptocurrency is used through different modes, be it investment, payment rail, medium of exchange, etc. While its use as a payment trail is prevalent, thanks to digital platforms like PayPal and Miami Dolphins, it has not gained its due in daily transactions among the general public. This could be attributed to the lack of a loop that has precluded creating a closed cryptocurrency economy. Nevertheless, price volatility is also a major concern.
Today we have hundreds of forms of cryptocurrencies; the most famous among them is bitcoin. Their use essentially depends on the “trust in information,” which ultimately leads to creating a ledger and differentiates it from fiat currency.
As cryptocurrency maintains a ledger and purposefully avoids any third-party endorsements, it has been difficult for the states to devise a mechanism for taxing it. Also, the currency is volatile enough to be distrusted to be counted as money by the financial institutions. Broadly, there are two methods of taxing cryptocurrencies, either by regarding them as “currency” or as “property.” Article 246 of the Indian Constitution provides parliament and state legislatures with the power to impose taxes. The Reserve Bank of India (RBI) in 2013 prohibited companies from transacting in cryptocurrency. Last year, the Supreme Court nullified the ban and allowed companies to transact in cryptocurrency, subject to the rules framed by the executive. As the use of cryptocurrency is legal in India, taxing it attracts the attention of financial experts. In this article, the author deliberates on the principles of taxing and argues that regarding cryptocurrency as property is the best way of taxing it.
Taxing Cryptocurrency- Currency or Property?
Both currency and property are subject to tax in every taxing system around the globe. However, the tax rates for money earned are general and for the property are preferential. Currency is something that is used as a medium of exchange. Cryptocurrency also circulates as a medium of exchange and provides an alternative low-transaction cost mechanism, thereby qualifying it as a currency.
While in today’s globalized inter-dependent world, currencies fluctuate due to a myriad of reasons, bitcoin purposefully avoids any such fluctuation by ostracizing any third-party involvement. This also furthers the intent of seeing it as a currency.
But, the reality is somehow not as optimistic for its qualification as a currency. Cryptocurrency is highly volatile and grossly uncertain, creating problems in marking a static numerical for its taxation. Also, the identities of parties are secretive, and therefore differential tax norms are difficult to be made. So far as treating it as a property is concerned, it has to be determined like an asset, a process that would ultimately diminish the propagation of cryptocurrency in digital commerce. Also, the property has been disposed of (including the forms of currency) decided by the taxpayer. The taxpayer must know the gain or loss made out of a deal. Given the volatile nature of the cryptocurrency, a taxpayer would be pinpointing the deal in her own currency, thereby making it far more confusing—most countries tax capital assets at a lower rate than they tax normal income. If cryptocurrency is a property, it should be taxed lower than other income. However, its distrustful nature makes it difficult, if not impossible, for the countries to audit cryptocurrency. Some had argued that “cryptocurrency did not exist when tax policies first came about in 3000 B.C.,” and thus taxing it with such “obsolete” norms is absurd. A whole new system has to evolve for dealing with volatility, closed-loop transactions, and balanced international taxation measures. The author does not subscribe to this view as cryptocurrency could still be fitted in one of the impugned mechanisms- currency and property. If a new system evolves, the conversion of cryptocurrency into regular currencies like the dollar, euro, or rupee would be further difficult.
Before jumping the gun with limited information, it is important to look into the mechanisms devised by the countries that have tendered cryptocurrency legal.
International Outlook on Taxing Cryptocurrency
While more than thirty countries have denied giving legal recognition to cryptocurrency, most developed counties have decided to go for it, though with diverse qualms and nuances.
The United States Constitution provides Congress with the power to the mint coin. For about half a decade, the U.S. left the issue of taxing cryptocurrency untouched. It was only in 2014 that the Internal Revenue Service (IRS) came up with the formula of “how existing general tax principles apply to transactions using virtual currency.” The IRS stated that all virtual currencies, including bitcoin, are “properties” for taxing purposes. The IRS escaped the question on behaviour of Cryptocurrency by stating that the State is yet to give it legal tender. The value of cryptocurrency in “real” money can be realized at any cryptocurrency exchange in a consistently applied and acceptable method to commerce. The miner of bitcoin shall be liable for the penalties in the case manner as any other taxpayer in case of tax evasion. This has been so far the broadest method used to tax virtual currencies. Nevertheless, ambiguities prevail over the use of phrases like “methods that are consistently applied” and the identification of taxpayer when she exchanges virtual currency with the real one. Furthermore, the onus of assessing the current exchange value by calculating all transactions is on the bitcoin user, which burdens them more. If there are wrong calculations, they shall be penalised. Many experts, and rightly so, have accused the American model of taxation of being impeding the growth of cryptocurrency.
The United Kingdom (UK) is largely the first country that found cryptocurrencies, not a threat, given their limited use in the market. The Department of Treasury also said that cryptocurrencies are unique and cannot be compared with any other payment mechanism. The UK does not regulate cryptocurrency and does not label it as currency or property. All the taxes have to be levelled by the UK corporate taxes, and no special tax slabs are made for virtual currencies. A value-added tax (VAT) is also to be levied on selling goods and services in the United Kingdom but not elsewhere. For now, the UK has left to the future to decide whether to call cryptocurrency money or property.
Canada shares the U.S. method by questioning users about their use of cryptocurrency in past months and taxing accordingly. It resorts to a kind of “barter” system wherein the Canadian citizens must add to the income the amount they would have received had they transacted in regular currency, i.e., dollar. Countries like Brazil and Japan have classified cryptocurrency as assets and subject them to business tax.
Conclusion
The growing use of cryptocurrency signals its significance in forming a major tax base of all the countries, so it is important to devise a taxation mechanism. Currently, cryptocurrency is infamously used for illicit activities, including tax evasion. Recently the Organisation of Economic Cooperation and Development (OECD) had called upon the countries to frame tax rules for cryptocurrency, which are transparent, inclusive, and consistent. This harmonization is desirable given the high number of transactions involve parties from different countries. Until such harmonization is done and things are put in order, countries should adapt their current tax laws to tax cryptocurrency. In India, cryptocurrency transactions are limited to a particular corporate circle and are not in prominence in the market at large. Treating it as a currency could lead to fluctuating tax norms, and its volatility could not be contained without any international regulation. The model developed in the United States is apt for India to adopt as it would fit India’s uniform tax base. Nevertheless, neither of the two- currency or property- best adjusts to the peculiar and “modern” demands of virtual currencies. The best model shall be internationally uniform regulative and calculative norms. Cooperation is the only possible solution in taxing cryptocurrency.