India has seen rapid acceptance of cryptocurrencies or digital currencies for business and investment purposes. The number of crypto exchanges or companies involved in the blockchain sector have also multiplied in the country in the last 24 months. But the absence of specific regulation and the lack of a legal framework regarding these coins has created a bottleneck in the innovation and adoption of blockchain technology and cryptocurrencies in the country.
For most of the last 24 months, there has been uncertainty about the legal status of cryptocurrencies and how residents treat them. Cryptocurrency and the Regulation of the Official Digital Currency Bill, 2021 (‘Bill’) proposing a sweeping ban has twice been included in the Lok Sabha’s legislative activity in the past year, but has yet to be tabled. Indian bureaucrats were not receptive to industry demands to recognize ‘virtual currencies’ as an asset class. However, the deferral of the bill for the second time and the failure to introduce it in the last winter session has given a signal that the government is now considering taking a calibrated approach towards cryptocurrencies, rather than banning them outright as it has. proposed the Inter-Ministerial. Committee in 2019.
While the bill was in the dock, the finance minister, in her 2022 budget speech, announced the imposition of taxes on cryptocurrency gains. The proposed taxation of 30%, with the cost of acquisition as the only allowable deduction, is among the highest tax rates for cryptocurrencies in the world. The tax rate is on par with the rate on gambling winnings. It is pertinent to note that, to date, the taxation of cryptocurrencies as an asset class for income tax does not provide for automatic recognition under the law.
The definition of a virtual digital asset under the Finance Bill 2022 is very broad and covers emerging digital assets, including non-fungible tokens (NFTs), assets in the metaverse, digital currencies, etc. The broad definition, high tax rate and cost of tax compliance can be a brake on the growth and use of cryptocurrencies in India. For income tax purposes, the Government has now specifically recognized virtual digital assets as “property”. The proposals aim to clear up uncertainty and at the same time discourage investment in these virtual assets.
The proposals, when implemented, may also increase the cost of compliance for exchanges and other operators, and individual sellers, as TDS @ 1% will be deducted on crypto transactions. As expected, vide the Central Government retained the power to exclude certain classes, by means of a notice. This seems likely to have been done to prevent ‘central bank digital currency’ from being treated as a virtual digital asset for taxes.
In addition, the Central Government must notify what constitutes an NFT, but with an already broad definition, almost all NFTs would qualify as a virtual digital asset without being separately notified. This is likely to create ambiguity in the future.
Taxes on certain aspects, such as the treatment of blockchain fees, airdrops, and mining income, are expected to be clarified in the future. The TDS deduction requirement may include all crypto transactions that are conducted through crypto exchanges within the scope of regulatory scrutiny.
At this juncture, it is pertinent to point out that the Ministry of Corporate Affairs see The March 24, 2021 notification made it mandatory for all companies to disclose cryptocurrency/virtual currency details on their balance sheets, in accordance with Schedule – III of the Companies Act 2013, effective from fiscal year 2021 -22, including the following:
- gains or losses on transactions involving crypto currency or virtual currency,
- amount of currency held at the reporting date, and
- deposits or advances from any person for the purpose of trading or investing in cryptocurrency/virtual currency.
The proposed tax regime and the requirements of the Companies Act are in line with the updated guidance for virtual assets issued by the Financial Action Task Force, an intergovernmental organization, in October 2021, which requires member countries to adopt a mechanism for supervision and monitoring of virtual asset service providers, customer due diligence provisions and sanctioning measures against money laundering and the financing of terrorism.
Treatment of cryptocurrencies in all jurisdictions:
Governments around the world are at different stages of enacting a regulatory regime for cryptocurrencies. While a large economy like China has banned the use of cryptocurrencies, smaller economies like El Salvador and Panama have embraced the new technology. El Salvador declared bitcoin as its legal tender in 2021. Being a dollar-adopted economy for two decades, El Salvador’s adoption of bitcoin had little impact on the global economy.
Singapore, a major economic hub in Asia, enacted the Payment Services Act of 2019 legalizing cryptocurrencies and putting in place provisions to regulate them. Notably, Singapore law excludes stablecoins, i.e. cryptocurrency coins pegged to a currency from the definition of digital payment tokens. The proposed changes to Indian tax laws include stablecoins within their purview. The Electronic Tax Guidance on the Treatment of Digital Tokens issued by the Singapore Inland Revenue Service clarifies that the tax is levied based on the nature of the activity performed through the use of the coins. When goods or services are purchased in Singapore in exchange for cryptocurrency, it is treated as barter and the value of the underlying goods or services provided is taxed.
In the US, a virtual currency is treated as a digital representation of value, distinct from a representation of the US dollar or a foreign currency that functions as a unit of account, store of value, and medium of exchange. The US treats virtual currency as property and the general tax principles applicable to property transactions apply to transactions using virtual currency, with capital gains and losses considered in arriving at tax amounts.
Canada, on the other hand, treats income derived from virtual currencies as business income or capital income depending on the nature of the activity performed. The tax is also paid when one currency is exchanged for another.
The UK treats cryptocurrency income as either capital gains or trading income, depending on the nature of the transactions, while allowing for offsetting losses. Similarly, Australia treats cryptocurrencies as an asset for capital gains tax purposes. Australia exempts capital gains from cryptocurrencies purchased for personal use under $10,000.
Cryptocurrency law is evolving every day and more clarity with the laws in India is expected when a comprehensive regulation is enacted. Currently, the Central Government has clarified the ambiguity surrounding taxes on cryptocurrency gains. This clarity in taxation can attract companies and individuals who were unable to enter the sector due to regulatory uncertainty.