Taxation on Cryptocurrency : A Comparative Analysis of India and United Kingdom

Taxation on Cryptocurrency : A Comparative Analysis of India and United Kingdom


In today’s time, virtual currency market has seen a major growth. Most virtual-currency investors  are High Net worth individuals, and ought to be suspected on unaccounted income invested in virtual currencies, since the sector yet is unregulated being relatively new. Since the investment in cryptocurrency gained popularity due to its anonymity factor, there arises unaccounted income earned, that could lead to cases of tax evasion. This essay delves into the the implications that a re c caused due to the unaccounted investments in cryptocurrencies, along with the taxation of these virtual-currencies in India and the United Kingdom.

Unaccounted Cryptocurrency Investments

In India, unaccounted income earned is lead out of the county’s law through illegal channels and then subsequently is used as capital to purchase cryptocurrencies, like Bitcoin, from websites or exchanges that have registration out of India. This practise is a violation of Foreign Exchange Management Act (FEMA) and also violates the regulations set through the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. With Accordance to this act, assets located outside India that are held by an individual without satisfactory explanation of the source of investment are subjected to investigation by an Assessing Officer. Many investors purchase cryptocurrencies like Bitcoin, outside India with the fund transfers through unauthorised channels, then, transferring it to public key of the beneficiary. Due to the anonymity of of public key holders and the nature of these cryptocurrency assets, there arises a high possibility that these transactions have evaded taxed in India. Investment in Bitcoin Mining, has also become a profitable industry. Investment in mining is usually done through mining operational companies, that in most cases are registered overseas. These companies distribute rewards to investors based upon the investment they put, which due to the unregulated systems, mostly evade taxes in India. There exist many popular platforms like the LocalBitCoins, that act like an escrow service by helping one facilitate peer to peer cryptocurrency exchanges. Due to the absence of pricing limits along with options of cash withdrawals on such platforms, make them a go-to choice for those buying or purchasing cryptocurrencies. These platforms also require minimum information of the individual trading cryptocurrencies, contributing to maintaining the anonymity factor to these cryptocurrency trades, keeping them unaccounted. 

Taxation of Crypto In India

Finance Act of 2022, embraced upon significant developments in India’s approach to cryptocurrency through the introduction of ‘Virtual Digital Assets’ (VDAs) and introducing the concept of crypto-tax. The profits from the crypto trade inclusive of selling, swapping or purchasing VDAs are subjected to a flat thirty-percent along a four-percent cess-charge. For the fiscal year of 2022-2023, a one-percent Tax Deducted at Source (TDS) that was applicable in all transfers was introduced. This led to any profits from cryptocurrency to be reported in income tax returns, there was also an introduction to penalties incase of failure to deduct TDS. The Indian Tax system differentiates between crypto currency investors and traders, investors ought to declare crypto income as ‘capital gains’, while traders report the same as ‘business income’. Any for of sale, purchase or exchange of cryptos attracts crypto tax. The Prevention of Money Laundering Act, 2002 (PMLA) has now encompassed Virtual Digital Assets, inclusive of cryptocurrency exchanges and wallet providers, fall under obligations of providing aid to Financial Intelligence Unite-India (FIU-IND). This also lets the government to keep an eye on any suspicious activity, that seems infringing to the Tax laws of India.

Taxation of Crypto in the United Kingdom 

Even the UK obtrudes tax on the gains made upon the trade of cryptocurrency. HM Revenue and Customs (HMRC) classifies digital assets into different types of tokens, i.e. utility tokens, security tokens, exchange tokens etc. these classifications are made based upon the tax treatment on specific transactions. The manner in which taxes are dealt with being contingent on the particular transaction. Capital gains derived from cryptocurrencies that surpass the tax-free threshold of £12,300 are subject to 10% or 20% tax liability. This allowance has been reduced to £6,000 as of April 2023. Further earnings in excess of the personal allowance are liable to be taxed at rates that vary between 20% and 45%. A basic rate of 20% is applied to income up to £50,270, a higher rate of 40% is applied to income between £50,271 and £150,000, and an even higher rate of 45% is applied to income beyond £150,000.

The UK’s tax system doesn’t not classify crypto-assets or currency. As an illustration, bitcoin is categorised as an exchange token, which functions as a payment medium. The tax rationale is uncomplicated: individuals are subject to capital gains tax if they generate profits from holding cryptocurrencies as personal investments.

Cryptocurrency assets acquired via minings or in exchange for services incur an individual’s tax liability.

The UK’s practical approach focuses on cryptocurrency profits, losses and income without requiring comprehensive reports. Non- disclosure of gains could subject an individual to a capital gains tax of 20% in addition of potential interest and penalties amounting to 200% of the tax liability.