Understanding Token Sales
Token sales refer to the initial offering of tokens before they become publicly tradable in the cryptocurrency market. There are different types of token sales, that include:
Initial Coin Offerings (ICOs)
ICOs is a way for cryptocurrency and blockchain-based projects to raise funds. In an ICO, the project creates and distributes a limited number of digital tokens, usually in exchange for established cryptocurrencies such as Bitcoin or Ethereum.
Investors participate in the ICO with the aim of making a profit by buying the tokens at a lower price and selling them at a higher price after the project has gained momentum and appreciated in value.
However, ICOs are highly speculative and come with substantial risks, as many projects may lack a clear product, development plan, or experienced team.
Initial Exchange Offerings (IEOs)
IEOs are fundraising events in the cryptocurrency world where projects sell their tokens through a cryptocurrency exchange. The exchange acts as a third-party intermediary, verifying the legitimacy of the project and performing a comprehensive analysis prior to listing the tokens.
Individuals can invest in an IEO by purchasing the project’s tokens using either the exchange’s own currency or a stablecoin. These tokens become instantly tradable on the exchange, offering investors a chance for price discovery and liquidity.
IEOs have become a favored alternative to Initial Coin Offerings (ICOs) due to the elevated security and credibility that comes with the exchange acting as an intermediary.
Initial DEX Offerings (IDOs)
IDOs are a fresh way for blockchain startups in the decentralized finance (DeFi) sector to raise capital. Instead of going through the conventional routes of venture capital or initial coin offerings (ICO), IDOs enable projects to sell their tokens directly to the community via a decentralized exchange (DEX).
When participating in an IDO, investors buy the project’s tokens using either cryptocurrency or stablecoins. These tokens then become immediately tradeable on the DEX, providing price discovery and liquidity for investors.
IDOs are gaining popularity as an alternative to traditional fundraising methods due to the potential for higher returns and increased transparency.
How are Crypto Tokens Taxed in India?
Before the Financial Year 2022-23, the tax implications of acquiring or distributing cryptocurrencies depend on several factors such as whether the person is engaged in the trade of cryptocurrency, the nature of the acquisition or distribution, and whether the units have an underlying value.
If anybody engaged in crypto trading acquires new units without consideration and they are marketable (with an underlying value), the receipt will be taxable as business income.
On the other hand, if the person isn’t engaged in trading and the units are either not marketable or don’t have an underlying value, new units upon receipt are tax neutral.
Similarly, if a person engaged in the trade of cryptocurrency acquires new units with consideration and the units have an underlying value, then the acquisition would be tax neutral as it would be considered stock-in-trade.
If the person is not engaged in the trade, then the units in the form of investment should not be taxable at the time of acquisition.
The distributors of cryptocurrencies can claim the value of the distributed units as a business expense.
Taxable events involving Token Sales
Crypto Initial Coin Offerings (ICOs) and their taxation can vary depending on the role of the individual involved. For those launching an ICO, tax authorities often view the funds raised as income and subject it to Income tax.
On the other hand, for investors participating in an ICO, capital gains tax is usually imposed on any profits realized from selling, exchanging, spending, or gifting the tokens obtained from the ICO.
The amount of tax owed depends on the location of the individual and the size of their gain. To calculate the gain or loss from an ICO, subtract the cost of the token at acquisition from its value at the time of sale. If the token was traded for another cryptocurrency, the fair market value of the traded token should be used in the calculation.
Let’s take an example.
Rohit is the founder of the XYZ Project and has raised funds of ₹10L by selling tokens for the project. Beginning April 01, 2022, the sale of tokens will be subject to taxation under the Indian Income Tax Act at a rate of 30% (plus surcharge and cess). Additionally, a TDS (Tax Deducted at Source) of 1% will be deducted on every sale.
For example, if the token sale value is ₹10L, the tax at 30% will be applicable on the entire amount. In this case, the tax would be calculated as ₹10L x 30% = ₹3L. This amount would be deducted from the total amount raised through the token sale.
Conclusion
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