What is cryptocurrency and how does it work to make profits?
Cryptocurrency is a type of digital or virtual currency that uses cryptography for security and operates on a decentralized network based on blockchain technology.
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It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
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The most well-known cryptocurrency is Bitcoin, but there are many others, including Ethereum, Ripple, and Litecoin.
People invest in cryptocurrencies for the same reason anyone invests in anything. They hope its value will rise, netting them a profit. If demand for Bitcoin grows, for example, the interplay of supply and demand could push up its value. If people began using Bitcoin for payments on a huge scale, demand for Bitcoin would go up, and in turn, its price in dollars would increase. So, if you’d purchased one Bitcoin before that increase in demand, you could theoretically sell that one Bitcoin for more U.S. dollars than you bought it for, making a profit.
What is the legal status of Cryptocurrency in Pakistan?
The legal status of cryptocurrency in Pakistan appears to be evolving. Recommendations and proposals from various entities, including KTBA and FPCCI, urge the enactment of laws to tax gains from cryptocurrency trading. Additionally, there are mentions of amnesty schemes and proposals for legalizing cryptocurrencies, but there are also references to concerns and distancing by regulatory bodies like SECP and SBP. There isn’t a clear-cut legal status as of now, and the matter is under discussion and consideration by relevant authorities. As of today’s date cryptocurrency is illegal in Pakistan.
Why cryptocurrency is not being legalized in Pakistan? (Explain practical issues)
Pakistan’s Minister of State for Finance and Revenue has reportedly said crypto cannot be legalized in the nation due to conditions set by the global money-laundering watchdog (FATF) for staying off of its list of countries under increased monitoring.
“As per regulatory instructions from the State Bank of Pakistan(SBP), any remittance of foreign exchange directly/indirectly outside Pakistan to overseas foreign exchange trading, margin trading, and CFD trading apps/websites/platforms through any payment channel is not allowed/permitted by SBP and such payments are inherently risky and illegal,” said one message from a bank in Pakistan viewed by CoinDesk.
Ali Farid Khwaja, chairman of KTrade Securities and CEO of BlockTech Pakistan, told CoinDesk that people fear a sovereign default, particularly as the Pakistani government has not been able to secure International Monetary Fund support.
Senator Farooq Naek also concurred, highlighting that crypto trading was speculative in nature and should not be allowed. “Digital currencies can be used for financial terrorism,” he said while calling for a complete ban on them through money bill.
Consumer Protection: Cryptocurrency markets can be volatile, and there is a risk of fraud or scams. Regulators may be concerned about protecting investors.
Money Laundering and Terrorism Financing: Cryptocurrencies can be used for illicit activities due to their pseudonymous nature, raising concerns about money laundering and terrorism financing.
Tax Evasion: There is a concern that individuals may use cryptocurrencies to evade taxes since transactions are often conducted anonymously.
If cryptocurrency was legal in Pakistan, how would it be taxed?
The FPCCI proposes a tax for converting cryptocurrencies to Pakistani rupees, a 5% tax on encashing cryptocurrencies held as deposits in foreign exchange accounts, and a 10% tax on encashing cryptocurrencies held as deposits in Roshan Digital accounts.
Under the proposed law, crypto gains will be charged as per Section 37A of Income Tax Ordinance, 2001, and should be defined as “securities”, a 15% tax on profits from crypto trading is being proposed. Further, converting crypto into cash and kept as deposits in Foreign Exchange accounts or Roshan Digital Accounts would be taxed too. The proposed law envisages a tax rate of 15% on gains from the sale of crypto, a 5% tax on encashment and deposits in Foreign Exchange accounts, and a 10% tax on if crypto assets are encashed and kept in Roshan Digital accounts.
How much tax revenue can be generated from Cryptocurrency Legalization?
Experts project an annual potential tax revenue of $100 million (Rs. 20 Billion) by legalizing crypto trade in Pakistan.
If anyone has generated profits from cryptocurrency and it is not legal in Pakistan, how do people declare such income in their tax returns?
Here is a general market practice. There are more safer and legal alternatives available. Please contact us in case if you need any assistance.
1. If payment is received in bank accounts directly from overseas, it can be reflected as freelancing income and bank will deduct withholding tax accordingly. You can show income from IT services in your income Tax Return (This is the only way to minimize your taxes and obtain the maximum benefits).
2. If payment is received locally under P2P method, then it has to be declared as income from other sources and bear taxes accordingly.
Note* The Above treatment is not as per the Pakistan Tax Laws and Scounts is not responsible for any Notice served by FBR in respect of the above.
However, Taxpayers are suggested to contact with Scounts Team for further guidance.
