1. Introduction
The year 2024 ended with two significant news events: the USA elected its 47th President, Donald Trump, and Bitcoin Triumphs the mark of 1,00,000 USD.
You must wonder about the correlation between India’s Budget, which will likely be presented on 1st February 2025, Donal Trump and Bitcoin. There is a strong correlation.
Before that, let’s start with the context. Bitcoin is a cryptocurrency known for its vulnerability, encryption, anonymity, and assets without intrinsic value. The price of Bitcoin spiked following the news that Donald Trump won the 2024 US Presidential Election. Trump’s promise to hold onto the Bitcoin owned by the federal government and establish a national reserve boosted investor confidence.
Until January 2023, investors had only one choice: investing directly in Bitcoin through unregulated or semi-regulated exchanges. Afterwards, investors got an alternative to invest through Bitcoin Exchange-Traded Funds (ETFs). Bitcoin Spot ETFs are different from Bitcoin futures ETFs. The Spot ETF holds Bitcoin, while futures-based ETFs create positions through derivatives. The Bitcoin Spot ETF allows investors to take Bitcoin exposure without holding the cryptocurrency directly in digital wallets or hard disks. This will eliminate concerns about potential cyber hacks and the intricacies of managing complex passwords when stored on hard disks. The Bitcoin ETFs are listed on the Nasdaq and NYSE.
A crucial question regarding the tax implications arises for an Indian resident investing in Bitcoin ETFs in the US market. The issue is whether the capital gains arising from the sale of Bitcoin ETFs should be subject to taxation under Section 115BBH, Section 50AA, or Section 112.
Section 115BBH is a special provision introduced by the Budget 2022 to tax income earned from transferring Virtual Digital Assets (VDA), including cryptocurrencies. Section 50AA is a special provision first introduced in the Budget 2023 to tax the income from specified mutual funds that do not allocate more than 35% of their total proceeds to equity shares of domestic companies. Subsequently, its scope was enlarged by the Budget 2024 to tax the income from specified mutual funds that invest more than 65% of their total proceeds in debt-based securities, such as debt instruments and money market instruments. Section 112 operates as a residual provision, encompassing the taxability of long-term capital gains from any capital asset not covered by the special provisions. The short-term capital gains from any asset other than those covered under Section 111A (i.e., listed equity shares, etc.) are taxable as per the applicable tax rate.
Let’s evaluate each provision separately.
2. Section 115BBH – Tax on Income from Virtual Digital Asset
This provision provides that income arising from the transfer of virtual digital assets is taxable under Section 115BBH at the rate of 30%. A “virtual digital asset” includes cryptocurrencies, NFTs and any other digital asset as notified. The units of Bitcoin ETFs may not be covered within the meaning of VDA as investors have not invested directly in the cryptocurrency. Instead, the Asset Management Companies (AMCs) may be taxed under this provision. Given that these USA AMCs are not subject to taxation in India, investors are not obligated to pay tax under Section 115BBH in this scenario. However, if the government notifies Bitcoin Spot ETF as VDA in the third class mentioned above, the resultant gains can be taxable under this provision. Until that happens, this provision may not apply.
3. Section 50AA – Tax on Capital Gains from Specified Mutual Funds
Section 50AA contains provisions for computing capital gains arising from transferring units of a Specified Mutual Fund (“SMF”). The specified mutual fund means a mutual fund (including ETF) that invests more than 65% of its total proceeds in debt-based securities, such as debt instruments and money market instruments. Since Bitcoin ETFs do not invest in debt instruments, they should be excluded from the purview of taxability under Section 50AA.
4. Section 112 – Tax on
Long-term Capital Gains
Section 112 is a residuary provision to tax long-term capital gains arising from transferring any capital asset. This provision applies when other special provisions are not invoked to tax long-term capital gains. According to Section 112, long-term capital gains arising from transferring a long-term capital asset on or after 23-07-2024 are taxable at 12.5% without indexation benefit. Where the capital asset is transferred on or before 2207-2024, the long-term capital gain shall be taxable at 20% after the indexation benefit. In the context of Bitcoin ETFs, units held for more than 24 months before the date of transfer should be regarded as long-term capital assets. If transferred on or before 2207-2024, the holding period shall be 36 months.
5. Conclusion
Section 50AA may not apply to tax gains arising from the transfer of such units because they are not covered within the definition of “specified mutual funds”. Similarly, Section 115BBH may only apply if the CBDT issues a notification explicitly including Bitcoin ETFs within the meaning of VDAs.
Consequently, the taxation of long-term capital gains from transferring units of Bitcoin Spot ETFs should be covered under the residuary provisions of Section 112. Regarding short-term capital gains resulting from the transfer of units within 24 months or less, taxation should follow the applicable tax rates for the assessee.
In this Budget, the Government could consider giving the same treatment to the Bitcoin ETF and Bitcoin. If that happens, all credit goes to Donald Trump.
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