How would I be taxed for selling cryptocurrency to a resident Indian?

I am living and working in the UAE for the past five years. I do cryptocurrency trading locally and I have cryptocurrency balances in my private wallet. A person in India is asking to buy Ripple and Etherium from me on a P2P basis, and the proceeds will be credited into my NRO (non-resident ordinary) account. Will this transaction attract any tax in India for me?

—Name withheld on request.

India’s exchange control law is not clear on whether a resident can buy cryptocurrency from a non-resident person on a P2P basis and thereafter credit the sale proceeds to the NRO account of the non-resident. Further, banks may also refuse to allow repatriation outside India knowing that the source of funds have arisen from the sale of cryptocurrency.

Keeping aside the exchange control law aspects, under Indian tax law, income derived by a non-resident is subject to tax in India only if it accrues or arises in India, is received or deemed to be received in India, or is deemed to accrue or arise in India.

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If you accept the offer of the Indian buyer outside India and also effect the transfer of cryptocurrencies from your private wallet while being outside India, then the income would accrue to you outside India. This is because, in a transaction consisting of mere purchase and sale, income ordinarily accrues at the place where the sale contract is made and also where sale is effected. In case of a P2P transfer, the transfer gets effected merely by entering the recipient’s appropriate wallet address. Even though the income accrual may not take place in India, since the payment would be received in India, income would become taxable in India on the basis of receipt in the NRO account. There is no further need to examine the aspect of deemed accrual in your case, which is dependent on the situs of cryptocurrency.

The special TDS (tax deducted at source) provision that relates to the transfer of a virtual digital asset would not apply in your case since you are a non-resident. If you hold the cryptocurrencies as long-term investments and not stock-in-trade, then the resident buyer would have to deduct TDS at 20% (plus applicable surcharge and cess) on the amount of capital gains derived from the sale of such cryptocurrencies.

On the converse, if you hold them as stock-in-trade or as a short-term capital asset (holding period of less than 3 years), then the resident buyer is required to deduct TDS at 30% (plus applicable surcharge and cess) on the profit derived from the sale transaction.

The eventual tax on gains derived from the sale of cryptocurrencies would be levied at 30% (plus applicable surcharge and cess) irrespective of the classification of the holding as investments or stock-in-trade. Further, apart from the purchase cost, you would not be allowed any expenditure such as network fees, etc.

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If you are eligible to obtain the benefits of the India-UAE double taxation avoidance agreement (DTAA), then you should opt to be governed by the DTAA provisions since they are more beneficial in this case. Capital gains arising to a UAE resident on sale of cryptocurrencies are not taxable in India under the DTAA, neither are business profits (in the absence of permanent establishment) taxable in India under the DTAA.

Harshal Bhuta is a partner at chartered accountancy firm P.R. Bhuta and Co.