Direct Tax Implications on Crypto Exchanges in India

The income of the corporations and individuals is taxed under the Income Tax Act, 1961 (the ‘ITA’). The ITA has the provisions to tax the Indian residents on their worldwide income and non- residents on their income which originated in India. But such treatment of non- resident income is subject to Double Taxation Treaty or Tax Treaty of India with various countries.

We need to analyze ITA in order to determine whether the income arising from trading, or exchanging virtual currencies shall be treated as profits or gains of profession or business, or they are subject to be treated as capital gains. If the exchange chooses to follow a direct trading business model, or non- Peer to Peer (the ‘P2P) model, through which exchange is by itself providing liquidity, the income would be taxed as part of the business income arising out of gain or loss from the business. Hence, it would be taxed as business income.

In case the Exchange is following the P2P model, it is not acting as a holder and cannot gain in the cryptocurrencies, and hence does not come under the ambit of Direct Taxes under ITA. But if the Exchange executes some trades, but not in capacity of it’s business, the gain on the transactions would be brought under the ambit of Capital Gains Tax.

In other instances, the case would have to be decided on case to case basis.

BY

Vijay Pal Dalmia, Advocate

Supreme Court of India & Delhi High Court

Email id: vpdalmia@gmail.com

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AND

Siddharth Dalmia

dalmiasiddharth1994@gmail.com

Mobile: +91 997179925