India will celebrate Raksha Bandhan on Sunday, and cryptocurrencies could be one such gifting option. “Crypto has been gaining prominence and has now become one of the latest gifting trends. With Rakhi around the corner, it is a good time to educate your siblings and family about crypto, and its investment benefits,” said Nischal Shetty, chief executive officer, WazirX.
According to Shetty, one can gift their brothers or sisters crypto tokens for as low as ₹100. The exchange also recently launched its merchandise store with Redwolf, which offers crypto clothing and accessories.
Another option is a crypto paper wallet. According to Sathvik Vishwanath, co-founder and CEO of Unocoin, a gift in crypto is possible using a simple paper wallet feature. This option works by having a single private key and bitcoin address, usually generated by an exchange, printed out onto a paper.
Cryptocurrencies’ popularity in India has exploded over the past year along with a spike in digital assets. Let’s take the example of the three biggest crypto assets, bitcoin, ether and cardano. While bitcoin has spiked 313% in the last year, ether and cardano have spiked 700% and 1,800% over the last one year.
Driven by the rally, the Indian crypto user base has risen to around 15 million with over $1 billion in assets.
“Besides having established themselves as an investable asset class, liquidity and transferability while offering top-notch convenience to the beneficiary plays out as a huge advantage in favour of cryptocurrencies vis-à-vis other traditional assets,” said Gaurav Dahake, founder and CEO, Bitbns.
According to Shivam Thakral, CEO, BuyUcoin, some of the most popular coins that can be gifted on special occasions are bitcoin, ether, chainlink, polkadot, and Kusama. “These coins can offer handsome returns on investments and create a good corpus for those who stay invested for mid to long term. Stablecoins such as tether can also be considered for gifting purposes,” he added.
The taxation angle
While modern gifting options such as stocks or mutual funds have their benefits, there are also challenges in the form of taxation that individuals must keep in mind.
However, the challenge of gifting crypto is much bigger as Indian regulations are not yet clear for cryptocurrencies. Right now, it is not even defined whether crypto is a currency or an asset.
Before understanding the taxation process of crypto as gift, we will first have to understand what money is.
“The word money has not been defined in any of the acts of Indian Parliament. However, this word has been defined a few times by the courts. There is a Supreme Court ruling in Dhampur Sugar Mills case, in which the apex court said that money is a legal tender. This legal tender has been defined in an RBI circular as a coin or a banknote that is legally tenderable for discharge of debt or obligation. If something is not coin or banknote, it is not a legal tender,” said Naveen Wadhwa, deputy general manager, Taxmann, a research and advisory firm.
Another RBI circular says that there is no unique definition of money either a concept in economic theory or as measured in practice. It further says that money is a means of payment and the lubricant that facilitates exchange.
“Therefore, if you take a legal definition of money, it means a legal tender. In broader terms, money can be anything that can be used as a means of payment,” Wadhwa added.
In this situation crypto can be considered as money, taking in view of RBI circular, which says that it can be a means of payment.
“Since bitcoin can be classified as money, therefore, it should be considered as a gift under the Section 56(2)(x) of Income-tax Act. In nutshell, a person should pay tax if they receive bitcoin of more than ₹50,000 or more in a year,” he said
Section 56(2)(x) says that a sum of money exceeding ₹50,000 in a year is taxed in the hands of a recipient.
However, certain close relatives are exempted under this rule. These relatives are, inter-alia, sister/brother; wife; brother/sister of the spouse; brother/sister of either of the parents; lineal ascendant or descendant; lineal ascendant or descendant of the spouse of the individual; as well as the spouse of the persons referred here.
Unlike money, whose value remains the same, crypto-assets such as bitcoin and ether can earn returns. Therefore, the recipient of the gift also has to keep in mind how the taxation rules will get applied on their returns from this crypto gift. This gets applied to a certain section of relatives.
“The relatives can be defined into two different categories. The first category is on which clubbing provisions apply and the second category on which this rule doesn’t get applied. The spouse, daughter-in-law and your minor child comes under the first category of relatives, these are covered family members,” Wadhwa added.
For example, if you gift crypto to your wife, then your wife will not be liable to pay any tax on the gains. However, the gains will be clubbed with your income, and you will be liable to pay taxes on the gains.
Also, if you gift crypto to family members other than the covered members, and they sell it, the resultant capital gains will be taxed in the family members’ hands.
The gains are considered as short-term capital gains (STCG), if the holding period of the crypto is less than 36 months. In this instance, the tax will be as per the applicable income tax slab of the individual.
If the holding period is more than 36 months, the tax will 20% of the long-term capital gains (LTCG) computed after claiming the benefit of indexation of cost of acquisition.
In a nutshell, if you are gifting crypto to your sister, then she doesn’t have to pay any tax on the gifted amount, but she will be liable to pay tax on the capital gains.
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