Legitimization Of Cryptocurrency? Looking At Recent Indian Crypto Tax Saga

Crypto Taxation Saga In Budget 2022-23 – Did It Legitimised Crypto In India?

When the Union Budget for 2022-23 was unveiled, the Indian crypto industry reacted like cheerleaders seeking to confirm if their team had scored a point. Festive celebrations, then hesitation; expression of crypto fanatics said, "Did we score a point, what is happening?"

India's FM, N. Sitharaman had made two notable crypto-related announcements while presenting the Union Budget for 2022-23. First, the government is to levy a 30% tax on any income from crypto and a 1% TDS on all transactions. Second, India intends to introduce a digital rupee (a Central Bank Digital Currency) within this financial year. The mountainous confusion for users is how crypto could be taxed and yet not be legal. The government has steered clear from suggesting crypto legal.

After unveiling of the budget, the Indian FM broke her silence on issue of legalising cryptocurrencies and said that the government has only taxed income emerging from cryptocurrency transactions and not done anything to make it legal or ban it or regulate it.

Simply put, the bill that gives crypto the supreme legitimacy or makes it legal will take time to come but government is not waiting for that to happen before taxing people. India awaits a crypto-specific legislation to be introduced in the parliament, deliberated upon and then passed by both houses to establish whether crypto is legal, meaning it can be received as an day-to-day speculative asset or as anything but a legal tender or form of money to buy and sell anything.

"No Jail Time for Dealing Cryptos?" India's to-be-announced legislation can still impose jail terms or fines, but not for simply dealing in crypto – they would apply if one breaches new tax rules that work out how much tax to pay: 30% tax on income, a 1% TDS on all transactions. Two conditions are that one cannot offset losses from a transfer of digital assets against any other income and that gifts will be taxed when it is in the hands of the receiver.

'Virtual Digital Asset'? The FM's use of "virtual digital asset" in her speech signals why many in the industry, and the media, are not saying crypto is legal. The budget draft defines them as "any information or code or token (not being Indian currency or foreign currency) generated through cryptographic means or otherwise, by any name called, providing a digital depiction of value exchanged." Government has deliberated using phrase "crypto-assets" to manifest that cryptos are not legal tender and you cannot buy or sell things with them but instead they are held as an asset-class for investing purposes. This terminology by government is wide and covers all sorts of digital or crypto assets for the purpose of taxation. Another point is that term 'virtual assets' is also being used by the global body, FATF, and because government wants to be aligned with global term usage.

Crypto Legal? The gains from cryptocurrencies were always taxable but the new rule will bring certainty in taxation of cryptocurrencies. Still, this new rule does not convey anything on its legal status which would come out once the bill on regulating these assets is introduced in Parliament. Just because it is taxed does not make it legal, this is the position currently.

Tax, but how much? People dealing in cryptos will be subject to a 30% tax on all transactions. Also, some investors have 1% TDS in certain circumstances. The 30% tax will apply each time an investor makes any capital gain.

If a crypto user sends 500 INR to an exchange and buys ETH, and it triples in value, the investor makes a 1000 INR gain. As per the new taxation scheme, the investor will be levied with tax of 30% on gain of 1000 INR. So, investor will be left with 1200 INR. The 1% tax TDS will be imposed on sale value (in this case 1500 INR) at the time of the sale.

TDS depends on the amount investors trade on exchanges. Individuals or entities with a net worth of under 50 lakhs are taxed with the 1% TDS if they invest more than 10,000 INR. Investors having less than 10,000 do not face this tax. Individuals face the 1% TDS above 50,000 INR. Investors will be levied with 30% tax if they do anything with their crypto investment besides convert the crypto back to rupees in their bank account.

TDS's responsibility resides with exchanges, and 30% tax should be filed by people directly. All "virtual digital asset" gains are to be taxed effective April 1, 2022, and 1% TDS will come in effect on July 1. On Feb. 3, CBDT said, crypto transactions conducted between 2021 and April 2022 will also become subject to this new tax, making this retrospective.

If we take gambling, it attracts a 30% tax, which is 30% on any speculative transaction. So, crypto is taxed at same rate. Crypto is a speculation, so it is also taxed at 30% rate.

Rocketing tax rates has been used "as disincentive" for low-income individuals and that TDS has been used to know the extent of activity and reduce anonymity in the crypto market.

Will crypto be legal? Only when government introduces a crypto-specific bill in parliament and it is passed and becomes a law, crypto will be seen as being legal, provided that the specifications will direct whether all aspects of the cryptocurrency ecosystem will be legal or not. It is uncertain when government will introduce the bill. FM, responsible for introducing the bill in parliament, has denied to give a time frame, saying consultations are going on. Only cryptocurrency issued by RBI– i.e., the digital rupee – will be a legal currency. Simply put, you can buy things only with the digital rupee and not ETH, BTC, etc.

Cryptos be made illegal anytime? Unfortunately, yes. A ban would only instigate black market and peer-to-peer transfers that are impossible to track and trace, resulting in a major tax revenue loss, too. Most suggests India's crypto market is too big to ban. That is one of the reasons why India has decided to tax it now, rather banning. CBDT Chairman has iterated that even if crypto trading is made illegal through legislation, the profits on trade will continue to be taxed.

What is likely is that every cryptocurrency apart from digital rupee (and most well-known currencies such as BTC, ETH) will be banned from being used as legal tender. Investors would trade cryptocurrencies as assets or purchase NFTs, but not food or other goods. We don't think that the legal status will be conferred on something that is not backed by the RBI. So even bitcoin or any other popular currency will not be given the legal tender status. Das has iterated that cryptos should be banned as they don't have any underlying value, not even of a tulip.

International Take On Crypto Legitimisation

Some countries have passed bills to legalise cryptos. Arizona has introduced a bill to make BTC legal tender; El Salvador has made BTC as legal tender. India's new crypto bill is in tunnels. Also, several prominent politicians in the US, EU, and other places are now demanding and getting their salaries in crypto.

After El Salvador allowed its consumers to use Bitcoin in all transactions, alongside the USD, Arizona, U.S. Senator W. Rogers has introduced a bill to make BTC a legal tender and it strives to add BTC to the list of instruments regarded as legal tender in Arizona and make the peer-to-peer digital currency a lawful medium of exchange, allowing citizens to pay debts, public charges, taxes and dues with crypto.

El Salvador, was the first country to permit consumers to use the cryptocurrency in all transactions, alongside the US dollar, in September 2021, making it a historic move.

India Government is progressing towards the soon-to-be-announced crypto bill, which is in tunnels and scrutinized properly so as to legitimise crypto. Indian Government, through its actions, have signalled it will not ban the cryptos, but will seek to regulate it.

Views are personal.