Cryptocurrency: Taxation and Legality
Cryptocurrency: Taxation and Legality
Much has transpired since our last piece here on the ubiquity and viability of crypto-based transactions in India. In other words, the conversation around cryptocurrencies in India, has now been rebooted. The Finance Bill of 2022 (as tabled during the Union Budget discussion of 2022-2023, Finance Bill), marked a watershed moment in India’s journey towards regulation of cryptocurrencies and fostering digital innovation and growth in the country. The presentation made it seem like India was at the cusp of something significant, whereas several other countries continue to wrestle with the consequences of assuming any liabilities around the adoption of cryptocurrencies, if and when subsumed into the mainstream.
Budget Considerations
During the pendency of the Cryptocurrency and Regulation of Official Digital Currency Bill (Cryptocurrency Bill), 2021, in an attempt to placate the chaos around the validity, legality, and liability associated with cryptocurrencies, the announcement to at least tax “virtual digital asset” was made.
The fiscal statute is set to add a new term “virtual digital asset” which is proposed to be defined as, “(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically; (b) a non-fungible token or any other token of similar nature, by whatever name called; (c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify”. Additionally, the Central Government also retains the right to exclude any digital asset from this definition.
The Finance Bill, while entailing the definition for virtual assets also provisions for non-fungible tokens (NFTs) in view of the large volumes of investments placed by individuals, as well as companies in this. In an astute move, the aim of realignment of the fiscal statute seems to reinforce the central government’s authority on the incomes of persons (natural and juristic, both), and to lend some visibility over any transactions occurring outside the country. An attempt was made earlier in March 2021, to require the companies to disclose, report if they have traded in cryptocurrency or virtual currency during the financial year.
Though there has been indication of bringing in a modicum of regularity into how the world reconstitutes around the transactions having with cryptocurrencies, the Budget discussion did not clarify on the legality. While it also did state that within a defined timeline, the Central Bank Digital Currency (CBDC) will be rolled out, there has been no discussion on the transactions involving private cryptocurrencies. Going back to the note that has been provided for the scope of the Cryptocurrency Bill, there persists the assumption that all private currencies may be prohibited in India, while allowing for the exceptions around use and promotion of the underlying cryptocurrency technology.
The Finance Bill also introduces Section 155BBH to the Income Tax Act, 1961, and imposes a tax rate of 30% on income or profits generated from the transfer of virtual digital assets. It has been clarified by the Finance Minister presenting the Budget that any expenses, barring the amount spent on buying the crypto-asset, cannot be set-off or deducted from the profits. Additionally, any losses stemming from this trade, shall not be permissible for being carried forward to the subsequent financial years. Alongside this, the Finance Bill also proposed introduction of 1% Tax Deducted at Source (TDS), on any transfer of crypto asset, provided that any conditions related to the aggregate sales with respect to meeting the threshold are met with. The language of the amendment clearly states that this shall extend to the trade of one cryptocurrency for another, and is not only upon involvement of cash consideration in the trade per se. For instance, where Ether is purchased by the use of Bitcoin, such a transaction will also be liable for TDS being deducted. For completeness, this provision applies to whether the consideration is being paid for wholly or partly in kind, in exchange of a virtual digital asset.
The current position of the fiscal statute is reminiscent of a scenario where the virtual digital asset is being rendered the status of an asset which is being bought or sold, with cash or kind being treated as consideration. Additionally, gifting of these assets will also be subject to incidence of tax, subject to certain predefined exceptions.
With the government considering the implications of regularizing cryptocurrencies which mostly do not have an underlying value, there is still a lot of speculation that is being made with respect to the investments that people have in this ecosystem. There are two ways to look at it, the first where people doing away with their earnings prior to the tax trigger dates, or people finding some hope comfort in knowing which bracket/ tax slab they will fall into, should there be a trigger. Either way, a lot also depends on the risk-appetite of the individuals who are trading in cryptocurrency, for reasons best known to them.
General Perception and Discussions
Moving slightly away from the discussion around whether it is only the volatility of the cryptocurrencies themselves, it is important to note as a developing company, there could be certain additional considerations attributable to the environmental, social, and corporate governance (ESG) reasons. With the Ethereum Foundation stating that proof-of-stake is upto 99% more energy efficient than proof-of-work validation, in theory this model is ESG-friendly, and may just a rise in its takers.
With our regulators focusing on investor protection and education, there are several implications which deal, facilitate transactions taking for cryptocurrencies. Also, it is important to note that unlike fiat currency, cryptocurrencies have more use than just being a mode of payment. This is something that even the central government recognizes, as blockchain technology brings in more utility than fiat money.
As we see more and more type of entities entering this space, with companies turning their intellectual property into NFTs, willing to trade and invest in cryptocurrencies, and individuals jumping into this latest fad bandwagon, the governance of all the stakeholders is bound to take center stage. With clear focus being placed on how to scope in this entire ecosystem in the realm of taxation, it is only a natural corollary that there are considerations being made for the Crypto Bill to accentuate the entire process flow.
Going forward
To instill consumer and investor confidence, it will not be unimaginable to allow the Securities Exchange Board of India (SEBI) to follow the footsteps of its counterpart in the United States, the Securities Exchange Commission (SEC). The SEC in recent past has been delaying any decisions with respect to several proposed spot exchanges and has also been aggressive in “reminding investors to watch out for investment schemes involving digital assets and “Crypto””. With the digital divide and lack of diversity, a social welfare economy like ours, would require any handholding which comes down from the sectoral regulators, central banking institutions.
At this juncture, the nature of treatment that has been given to cryptocurrency is akin to that which is received by gambling. Neither is considered legal only because these activities are taxed. Similar to several other developed countries, however, where debates continue to juggle between assuming cryptocurrencies as “assets” or “securities”, while India has chosen to tax this asset, there is still ambiguity on whether or not such assets would be considered legal tender. All these issues need to be addressed and elaborated, and considerations on whether having a CBDC is better than having a plethora of private virtual digital assets is better. It should not be that we miss the bigger picture, while focusing on the brushstrokes.