What are Cryptocurrency and how do they work?

Cryptocurrencies, or “cryptos”, are being billed as the future of money. While some people see them as having limitless potential and uses, others are less than convinced. Cryptocurrency are not yet mainstream, but a growing number of companies and financial institutions are buying into them and their burgeoning influence around the world.

Let us help you make sense of what cryptocurrencies are and learn why they will matter in the near future.

TABLE OF CONTENT

What is Cryptocurrency?

Cryptocurrency is a digital currency that is used to buy goods and services. These types of currency are generally issued by various companies called as a token. These tokens are used for buying goods and services which are provided by the company. To access goods and services of the company, they have to exchange the real currency into cryptocurrency.

Blockchain is the technology used for cryptocurrency. It is the decentralized technology spread among various computers to manage the transactions related to cryptocurrency.

There are more than 4000 cryptocurrencies issued by the companies. Bitcoins are the most common than other cryptocurrencies. There is no law in the country related to buying/ selling of cryptocurrency.

Advantages of Cryptocurrency

  • Funds can be transferred easily as no third party is required
  • It’s a cheaper alternative as compared to other online transactions.
  • It offers an unprecedented level of anonymity.
  • Payments are safe and secure.
  • Minimum processing fees are required.
  • A Cryptocurrency system comes with a user wallet or account address that can only be accessed with the public or private key. The private key will only be known to the owner.

Legality of Cryptocurrency in India

Cryptocurrencies are not illegal in India. So if you want to buy, let’s say Bitcoins, you can do so and start trading in it. However, India does not have a regulatory framework to govern cryptocurrencies as of now. The government had constituted an Inter-Ministerial Committee (IMC) on November 2, 2017, to study virtual currencies. The Group’s report, along with a Draft Bill, flagged the positive aspect of distributed-ledger technology and suggested various applications, especially in financial services, for its use in India, including banks and other financial firms.

However, the Centre had flagged reservations around its misuse and wanted to put a blanket ban in India. Latest reports say cryptocurrency may not face a complete ban in India. The Centre may soon set up a panel to regulate them. The decision was taken after several cryptocurrency exchanges urged the Centre to regulate virtual coins rather than banning them.

Applicability of Income Tax on Cryptocurrency in India

Taxation of income in India is governed by Income Tax Act, 1961. Bitcoins could be deemed as capital assets if they are purchased for investments by the taxpayer. Any gain which arises from the transfer of the cryptocurrency will be taxable under capital gains.

  • If the investor holds cryptocurrency for more than 36 months then it would be taxable under the long-term capital gain.
  • If it is for less than 36 months than it would be taxable under short-term capital gain.

However, if the transactions related to cryptocurrency are more frequent then, it could be held that the taxpayer is trading in cryptocurrency. The income from the sale of such currency would be taxable under business income.

Basic Tips to Invest in Cryptocurrency

  • Research Exchanges: Before investing in cryptocurrency, investors should do the proper research and review about the currency as there are more than 500 types of exchange.
  • How to store your digital currency: Before investing the investors should investigate the storage. Where the investor should store i.e in the digital wallet or an exchange. There are many kinds of wallets and exchanges having their benefits and securities.
  • Diversify your Investments: Diversification is very important for a good investment. As investing is only one crypto cannot be a good decision there are many such types of currency. The investor should diversify the investment in another cryptocurrency also such not stick to one. For eg., Bitcoin is very popular so, it’s not important to invest the entire money in one. They can invest in others like ether, litcoin etc.
  • Prepare for volatility:If your investment profile or mental well-being can’t handle the ups and downs of the cryptocurrency then should not invest in it. As the market of cryptocurrency is very volatile and the price of the currency changes very drastically.

Most Common Types of Cryptocurrency

  • Bitcoin: It is the first decentralized cryptocurrency using blockchain technology to facilitate payment and digital transactions. It is considered an original cryptocurrency. It was created in 2009 as open-source software. Like banks, there is no centralized authority for bitcoins. The users control the sending and receiving of money which allows anonymous transactions in the entire world.
  • Bitcoin cash: It came in 2017 and most popular cryptocurrency in the market. Its main difference with bitcoin is the block size, the original bitcoin is 1MB and bitcoin cash is 8MB which means that bitcoin cash has a faster processing speed.
  • Litcoin: It came in 2011, and it particularly works in the same way as bitcoin. It was introduced by Charlie Lee a former employee of Google. It was designed to improve bitcoin technology, which decreases the transaction time, lowers fees. It is the 6th largest cryptocurrency in the world.
  • Ethereum: It came in 2015; basically it’s like an app store and returns the control of the app to its original creator. The only person who can make changes would be the original creator and take away control from the middle man. Ether is a token that is used by the app developer and users. It is 2nd largest digital currency after bitcoin.
  • Ripple: It is one type of cryptocurrency but blockchain technology is not used in this. It’s not meant for the individual user but for the large corporation and companies, moving a large amount of money across the globe.
  • Stellar: It came in 2014 and focuses on money transfer and the network is designed to make them faster and efficient even across the borders. It is operated by a non-profit organization called stellar.org.
  • NEO:It was developed in china and its focus is the smart contract that would allow the users to create and execute the contract without an intermediary.
  • Cardno: It is used for sending and receiving digital funds. It claims to be a more balanced and sustainable ecosystem for cryptocurrency.

These are some of the common cryptocurrencies which are used by individuals and companies.

Conclusion

With changing trends there are high chances of cryptocurrency to take a major stake in the capital market. The investors will have more investment options and they can trade easily in such digital currency without any middleman. As for now there is no law in India, but if it will take a major stake in the globe then in upcoming years there can be various laws. With the enactment of the law, the trading of such cryptocurrency will be legal and more secured.

CategoryMiscellaneous

CA Rishabh Maheshwari is an associate Chartered Accountant having expertise in conducting statutory and internal audits of large clients. He has also done a certified course on Concurrent audits of banks. He is responsible for coordination, planning, team leadership in connection with Audits and GST of Private and Public Companies with an experience of almost 3 years.

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