Cryptocurrency Tax: Tax Cloud Over Cryptocurrency Exchanges As Income Tax Department Plans To Investigate

New problems could be brewing for cryptocurrency exchanges, as the income tax department is now planning to investigate them on the tax applicable to their total income. This comes after the Goods and Services Tax (GST) department conducted research last week on crypto exchanges. The direct tax department may look into how much corporate tax to pay for cryptocurrency exchanges, people familiar with the development said.

Last week, the Directorate General of GST Intelligence (DGGI), an investigative arm of the Indirect Tax Service, conducted research on several crypto exchanges and asked them to pay GST on their transaction fees or margins. The fear is that the tax authorities will question the way exchanges account for their income.

“There is no clarity in how exchanges recognize income. Each company does so according to its understanding of accounting and income tax officials are concerned about ambiguity,” said someone familiar with development. “In some cases, recognized revenue is many times greater than exchange margins. Margins are actual exchange revenue, but that will need to be established with the tax authorities,” said a senior tax lawyer advising at least two top exchanges. . said ET.

Then there is the question of tokens issued by exchanges and how to capture the increase in their value. Direct and indirect tax departments have started sharing data with each other to ensure better tax compliance.

The Indirect Tax Department has already collected the data during recent GST non-payment investigations, and the data is now being shared with the Direct Tax Department for further investigation. The department discovered that several cryptocurrency exchanges held entities in tax havens like Seychelles, British Virgin Islands (BVI) and Mauritius.

Another person familiar with the development said, “The holding structures and the way money is sent out of the country could also create income tax issues for some of the cryptocurrency exchanges.”

At the heart of the problem is how cryptocurrencies are classified without any regulations in place.

Tax rates on returns from various assets, such as currencies, stocks, gold, technology, services, or the lottery, can range from 10 to 42 percent. “From a tax and assessment perspective, the GST on cryptocurrency has been the subject of a dispute. It is not clear whether cryptocurrencies are goods or services, but cryptocurrency trading is not illegal,” said Abhishek A Rastogi, partner at Khaitan & Co.