- Receiving cryptocurrency as a reward for mining is taxable in India under Section 28(iv) of the Income Tax Act.
- Transferring the cryptocurrency which was earned through mining will be taxable at 30% under the newly introduced Section 115BBH of the Income Tax Act.
What is Mining in Cryptocurrency?
Cryptocurrency is a digital currency that usually operates on Blockchain Technology, a chain of blocks or an online ledger that is shared and controlled by a peer-to-peer network of computers. This online ledger maintains records of all transactions made with the Cryptocurrency. Whenever a new transaction takes place, it is first verified by the network member(s), and then the ledger is updated to mark the transaction complete. This process of verifying transactions on a Blockchain network is called Mining.
Miners have to solve a complex algorithmic problem (Cryptographic keys or hashes) that requires advanced computational power to verify the transactions. The first Miner to validate the transaction is rewarded with a newly minted coin.
Is Cryptocurrency received from Mining a taxable income in India?
Yes, the income from Mining Cryptocurrency is taxable in India.
Section 115BBH of the Income Tax Act introduced by Finance Act 2022, which considers income from the transfer of virtual digital assets as taxable, does not explicitly state the treatment of income generated from Mining. Therefore, we need to look at provisions made under other applicable sections of the Income Tax Act. Consider the following two instances for Mining income:
1. A full time/professional Miner receives the Cryptocurrency coin as a reward for mining – This instance doesn’t meet the definition of ‘Transfer’ under Section 2(47) of the Income Tax Act, and therefore Section 115BBH introduced by Finance Act 2022, will not be applicable here.
However, this income will be taxable under Section 28(iv) of the Income Tax Act, which clearly states that the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of a profession is chargeable to tax as business income.
Under this Section, the Fair Market Value of a coin at the time of its receipt will be taken as chargeable business income and will be taxed at standard tax rates as applicable to each category of taxpayer.
Let us understand this through an example:
Example 1 – Mark is a full time/professional Cryptocurrency Miner. He earned 1 Coin as a reward for Mining Cryptocurrency M. The Fair Market Value of Cryptocurrency M at the time was Rs 1 Lakh. Under Section 28(iv) of the Income Tax Act, Mark will be deemed to have 1 Lakh as his chargeable income and will need to pay taxes at standard rates applicable as per his individual tax slab.
2. Transfer of crypto coin that was earned via mining to fiat or other cryptocurrencies – Instance 2 occurs when at a later stage, when the Professional Miner transfers the Crypto coin he received for his transaction validating services on the blockchain, i.e. he either sells it for Fiat currency or Exchanges it with another Cryptocurrency – This income (w.e.f. 1 April 2022) will be taxable at 30% (plus applicable Surcharge and Cess) under the newly introduced Section 115BBH of Income Tax Act introduced by Finance Act 2022.
Let us understand this better:
Example 2 – Let’s say Mark later sold his 1 Coin of Cryptocurrency M (received as a Mining reward) to his friend for Rs 1,50,000. In this case, Mark will have a chargeable income of Rs 50,000 (Sale proceeds less cost of acquisition assumed at Rs 1 Lakh), to be taxed under Section 115BBH of Income Tax Act at 30% plus applicable Surcharges and Cess).
Is Mining Infrastructure Cost deductible from taxable income in India?
Sub-section 2 of Section 115BBH of the Income Tax Act states that irrespective of any provisions under any other sections of the Income Tax Act, no deductions for any costs other than the cost of acquisition, if any, will be allowed while calculating chargeable income arising from transfer of virtual digital assets.
Therefore, any cost incurred by a miner, be it infrastructure costs or operating costs such as rentals, electricity etc., for his workplace will not be allowed as deductions from the income generated by the transfer of virtual digital assets.
(We recommend that taxpayers maintain proper and detailed accounts for expenses incurred for Mining services. Tax laws for Cryptocurrency are evolving, and in future, if the provisions are made in Income Tax Act to allow deductions for these expenses, these accounts can be used to claim such expenses and reduce tax liability).
However, the Miners can claim deductions for the cost of acquisition of the asset transferred/exchanged/sold. For this, the coin’s Fair Market Value at the time of its receipt can be taken as its cost of acquisition. This is applicable only when the Miner has paid taxes on income under Section 28(iv) at the time of receipt of the coin for mining services. If no tax has been paid under Section 28(iv), the acquisition cost will be assumed as Nil, and the taxpayer will need to pay tax on the entire sale proceeds.
Example 3 – In Example 2 above, if Mark had not earlier paid applicable taxes on income at the time of receipt of the Mining reward, applicable under Section 28(iv) of the Income Tax Act, the entire sale proceeds of Rs 1,50,000 will become his chargeable income under Section 115BBH. The cost of acquisition will be taken as Nil. Further, this income will be charged at a 30% Tax rate (plus applicable Surcharge and Cess).
Example 4 – In example 2 above, had Mark sold his one coin of Cryptocurrency M to his friend for Rs 80,000, the following two scenarios would apply.
a. Scenario 1 – Mark had paid applicable taxes on the income at the time of receipt of the Mining reward under Section 28(iv) of the Income Tax Act. In this case, he would be deemed to have incurred a loss of Rs 20,000 (Sale proceed less Cost of Acquisition that will be assumed at Rs 1 Lakh) and will not be liable to pay any taxes under Section 115BBH of Income Tax Act. However, he will not be allowed to set off this loss against any other income and will not be able to carry forward this loss to succeeding assessment years.
b. Scenario 2 – Mark had not paid applicable taxes when receiving the Mining reward on the Income under Section 28(iv) of the Income Tax Act. In this case, the entire sale proceeds of Rs 80,000 will become his chargeable income under Section 115BBH, as the cost of acquisition will be taken as Nil. Further, this income will be charged at a 30% Tax rate (plus applicable Surcharge and Cess).
Note – In the case above where Mark carries out mining activities on a part-time basis/as a hobby/rarity, it is reasonable to assume receipt of coins from mining as ‘Income from Other Sources’. It would be taxable under Section 56(1) of the Income Tax Act. For this purpose, the taxpayer’s income will be assumed to be the Fair Market Value of the Coin(s) received and will be taxed at normal rates applicable to the taxpayer. If the miner later transfers such a mined coin, the gains shall be taxable under Section 115BBH at 30% (plus applicable Surcharge and Cess) as per the newly introduced provisions of the Finance Act 2022. Taxpayers, in this case, can claim deductions for the cost of acquisition of the asset transferred. For this, the Fair Market Value of the coin at the time of its receipt (on which tax was paid on receipt of the mined coin under Section 56(1) mentioned above) can be taken as its cost of acquisition.
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