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

Cryptocurrencies or digital assets given to staff as incentives by crypto exchanges are about to be scrutinized by the IRS.

The question is whether the coins—the majority of which are produced by Indian exchanges—can be regarded as income, and if so, what kind of income tax will be applied to digital assets.

Many exchanges have launched their own tokens and are offering them to their employees as part of their annual compensation, similar to an employee stock ownership plan or esop. It was also linked to employee performance in some circumstances.

While the arrangement may appear to be comparable to an esop, tax experts warn it will not be treated as such under the law.

“Cryptocurrency or coins given to employees are nothing more than salary,” Sudhir Kapadia, national leader-tax, EY India, said. “They shouldn’t be equated to esops because these have a permissive interpretation and tolerance when it comes to income tax.” “These coins should be subject to regular income taxation based on their true market value in the year they were given to the employee.”

This could imply that the tax authority will tax these coins at their current market value throughout the year.

The value of these coins, as well as other well-known cryptocurrencies like Bitcoin and Ethereum, has skyrocketed in the previous two years.

According to industry watchers, providing tokens as staff incentives is becoming more popular among companies and crypto exchanges.

“”Token incentives are appealing to businesses because they do not dilute their shares, and they are also popular with employees because the tokens could greatly increase in value,” said Praveen Kumar, CEO of cryptocurrency exchange Belfrics Global. “Multiple structures and combinations can be produced to issue restricted and non-restricted tokens due to the smart contract capability of crypto assets.” Many crypto exchanges use their own exchange tokens for staff remuneration when startups use their project tokens for that reason.”

Income tax, on the other hand, will only be triggered in the year in which the employee receives the money, according to tax experts.

“Of course, if there is a contractual aspect of deferred remuneration, the taxing incidence will be pushed to a later period based on the contractual provisions,” said Kapadia.

This comes as the government prepares to adjust the income tax rate for cryptocurrency investors in the next budget. From this year forward, money gained from trading or investing in cryptocurrency will be considered as business income rather than capital gains, according to ET, as the government tries to fine-tune the definition of income and profits particularly for crypto assets in the 2019 budget.

This means that, in the future, the income tax on earnings for investors or traders might be as high as 35 to 42 percent.

Top cryptocurrency exchanges and the coins they produce have recently been scrutinized by the IRS.

Many exchanges, according to the indirect tax department, issued their own coin but did not pay GST on it. The tax authority said that the coins sold on the exchange are subject to an 18 percent GST.