Best Cryptocurrency Exchange Fees

crypto exchanges: Digital coins issued by Indian exchanges to employees to face income tax complications

crypto exchanges: Digital coins issued by Indian exchanges to employees to face income tax complications
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Cryptocurrencies or digital assets issued to employees via cryptocurrency exchanges where incentives are set to be under a tax lens.

The question is whether the coins – mostly issued by Indian stock exchanges – can be interpreted as income and what would be the income tax applicable to digital assets.

Many exchanges have floated their tokens and offered them as part of the annual income of their employees – similar to an employee stock ownership plan, or esop. In some cases, it was also related to employee performance.

Tax experts say that while the arrangement may look similar to an esop, it will not be treated as one under tax laws.

Sudhir Kapadia, Head of Income Tax, EY India said: “Cryptocurrencies or coins given to employees are nothing but a salary and should not be equated with these cryptocurrencies as they have a liberal interpretation and time limit when it comes to income tax.” Facing ordinary income tax also on the actual market rate in the year the employee earned it.”

This may mean that the tax department will tax these coins in the year based on their market value.

Over the past two years, these coins have skyrocketed in value, along with other cryptocurrencies such as Bitcoin and Ethereum.

Industry trackers say that issuing tokens as incentives to employees is gaining popularity among startups and cryptocurrency exchanges.

“The incentives for tokens are attractive to employers because they do not dilute their equity and are also very popular among employees because the tokens can significantly increase in value,” said Praveen Kumar, CEO of Belfrix Global, a cryptocurrency exchange. The ability of a smart contract for crypto assets, multiple structures and combinations to issue both restricted and unrestricted tokens, can be realized. When startups use their project tokens in exchange for employee compensation, many crypto exchanges use their own exchange tokens for the stated purpose.”

Tax experts say the income tax, however, will only take effect in the year the employee actually gets the money.

“Of course, if there is an element of deferred compensation in accordance with the contract, the tax effect will be shifted to a future date depending on the contractual terms,” Kapadia said.

This comes at a time when the government is looking to fix the income tax rate for crypto investors in the upcoming budget. ET wrote on Wednesday that money earned from trading or investing in cryptocurrency will be treated as trading income in exchange for capital gains from this year onwards as the government looks to adjust the definition of income and earnings specifically for crypto assets in the upcoming budget.

This could mean that income tax on returns for investors or traders could be as high as 35% to 42% in the future.

Cryptocurrency exchanges and coins that issue them have already come under a tax lens lately.

The Department of Indirect Taxes claims that several exchanges issued their cryptocurrency but did not pay GST on it. The Tax Department has confirmed that the 18% GST is applicable to coins sold on the exchange.

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