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What are Crypto Swaps? Taxation of Crypto Token Swaps in India

Key Takeaways 

  • Cryptocurrency token swaps are when one cryptocurrency migrates from one blockchain to another, and the underlying coin that supports the blockchain is swapped in for another. 
  • Cryptocurrency token swaps are often referred to as token swaps or token migration because users may confuse cryptocurrency swaps in the trading lingo. 
  • Currently, no specific guidelines have been published from the Income Tax Department in regards to how cryptocurrency token swaps need to be taxed. 
  • Irrespective of whether regulations are in place, one needs to account for the taxation of cryptocurrency token swaps in India at the time of filing and paying taxes. 
  • This article does not cover a cryptocurrency-to-cryptocurrency trade (e.g. Bitcoin for Ether) which is clearly a taxable event (Qualifying as “Transfer” as per the recently introduced Cryptocurrency Taxation regime)

Before we delve into the taxation environment of cryptocurrency swaps, let’s understand what cryptocurrency swaps are, the nature of such transactions, and why they occur. 

What are cryptocurrency swaps? 

In nuanced terms, cryptocurrency swaps can be understood as buying one cryptocurrency in exchange for another. However, that is not the only case for it. 

Cryptocurrency swaps can be split into two categories: 

1. Cryptocurrency Swap Trading (Crypto <> Crypto Trades)

This example is buying one cryptocurrency in exchange for another cryptocurrency via an exchange or a seller. 

For example: Buying BTC in exchange for ETH over an exchange. 

This is a prime example of cryptocurrency swap transactions. Regulations have been provided by the Indian government in regards to the taxation of crypto to crypto transactions which clearly is a taxable event (qualifying as a “transfer”, as per the recently introduced Cryptocurrency Taxation regulations). 

2. Cryptocurrency Token Swap 

A cryptocurrency token swap is the transfer of digital tokens from one blockchain into another. It usually occurs when a project uses one blockchain to raise funds and then migrates its tokens to another proprietary blockchain after launching the project’s main net.

For example: BNB (ERC-20 token) swapped to BNB (coin), or Shadow Cash swapped to Particl.

Token swaps and migration to other blockchain networks could happen for a number of various reasons. The development team must provide the means for investors and users to swap the project’s native token for another compatible token with the new network.

This article will be demystifying the second format of the cryptocurrency swap.

Why do cryptocurrency swaps exist? 

When cryptocurrencies are launched, the underlying asset is usually a blockchain network. Over time, the owners of the cryptocurrency may want to switch blockchain networks or have adopted some new practices. In such a situation, there is usually a blockchain switch, and the holders of these cryptocurrencies need to take some action. 

In such a situation, the old tokens are swapped out for new tokens on a new blockchain ecosystem. Most of the time, the exchanges where you hold these coins will carry out the cryptocurrency corporation action itself. 

Example: The FET coin is undergoing a token swap wherein every 1 FET coin is now going to be exchanged for 20 new FET coins. The conversion rate is 1:20. 

D, a cryptocurrency investor, holds 20 FET coins on an exchange. Since the exchange is going to execute the swap on behalf of D, earlier D had 20 FET coins. Post the token swap, D now has 400 new FET coins. 

In case the exchange does not carry out the token swap action on behalf of the users or the users have the token on a hardware wallet, it is important the users carry out the token swap accurately. If not, there is a chance they may lose their tokens altogether. 

Taxation of cryptocurrency token swaps 

Moving on to the taxation of token swaps. 

Currently, no guidelines have been mentioned by the Income Tax Department for the taxation of cryptocurrency token swaps, and therefore the generic law of 30% taxes plus applicable Surcharge and Cess would be imposed on income from the transfer of Virtual Digital Assets (VDA) with deduction only for the cost of acquisition. 

Taxpayers here, after the token swap, need to consider the adjusted cost of acquisition while computing the income from the transfer of VDA.

Since there is no specific guidance from the Income Tax Department regarding the taxation and accounting of a token swap, we need to use generally accepted principles for determining these taxable events and income computations.

Cryptocurrency Token Swaps are treated as Stock Splits 

Since cryptocurrency token swaps resemble stock splits, the treatment for taxations is calculated similarly. 

In short, what is a stock split? A stock split occurs when a company creates additional shares, thus reducing the price per share.

In other words, when new shares are received on account of a stock split, the total number of shares with the individual would increase, but the total value of the investment remains the same. In such a scenario, the total value of investment should be divided into the total number of shares available with the individual after the stock split.

Example: BYT is a stock trading on the exchange. It announces a stock split of 1:5. That is, for every 1 old BYT stock, investors will get 5 new BYT stocks. The value of their investment would not change, but the number of shares would increase, and the price of the stock would reduce, hence balancing out the entire situation.

The above example is very similar to a cryptocurrency token swap, and hence the tax implications for them are similar to a stock split. 

Cryptocurrency Token Swap Tax Example 

Let us assume that taxpayers who owned the token ABC had to go through a cryptocurrency token swap. The predetermined conversion rate was 1:10. So, after the token swap, each TOKEN of ABC was replaced with 10 units of XYZ.

Before Swap 

Let’s assume A has 10 ABC tokens worth INR 10,000. That is, each coin is worth INR 1,000. 

During Swap 

He sends his ABC balance in for a swap. ABC is discarded, and he receives 100 (10 x 10) XYZ tokens in return. If A fails to properly perform the swap, he will lose access to the legacy (EARLIER) token, whose blockchain may have stopped operating.

Post Swap 

He now owns 100 XYZ tokens. However, the total value of the token is still INR 10,000. But the value of each token has fallen to INR 100. 

So even though the number of tokens has increased from 10 to 100. The total investment value has remained constant at INR 10,000. That means no gain or loss has been made on the transaction, and hence no tax needs to be paid for this transaction. 

However, when A further disposes of 50 XYZ tokens for INR 200 each, then the Income generated would be INR 5000 [INR 10,000 (50*200) less INR 5,000 (50*100) being the adjusted cost of acquisition post token swap]. Income tax payable on the above Income would be INR 1500 (Income of INR 5000 * 30% Income Tax) plus applicable surcharge and cess.

To conclude, while cryptocurrency token swaps do not have clear tax regulations, they are treated akin to equity swaps, which do not have tax implications at the time of the swap since there are no capital gains. 

Now that you know how crypto swaps are taxed, you’re wondering how to calculate the taxes on them. Binocs has got you covered. Binocs helps you calculate accurate and timely taxation on all your crypto transactions. Whether they’re USDT transactions or P2P, Binocs will recognize them for you and help you generate an accurate tax report, all while being compliant with the latest regulations. 

Frequently Asked Questions 

1. Are there two types of cryptocurrency swaps? 

Yes. The first one is a crypto<>crypto trade (BTC<>ETH). The second one is cryptocurrency token swap, wherein the underlying blockchain experiences a switch, and new tokens are issued of the previous same value. 

2. How are cryptocurrency token swaps taxed? 

Currently, no clear regulations have been mentioned for cryptocurrency token swaps. Investors are advised to follow the above-mentioned treatment given to stock splits for computing the income, wherein the cost of acquisition is adjusted for change in quantity from the token swap event.

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