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Essentially, the two most distinguishing characteristics of cryptocurrencies in general are the absence of third-party intervention and decentralization. In addition to this, yet another factor that distinguishes cryptocurrencies from other digital assets is that they are convertible to legal tender on a cryptocurrency exchange. Anonymity, transparency, control, security and low transaction costs are few of the numerous advantages of digital currencies. Nevertheless, they are riddled with the impediments of risk and volatility, tax evasion and illegal activities. Cryptocurrencies function through the distributed ledger technology, a large, decentralized database that is maintained on a network of computers rather than a single server, and that is updated in real-time.
Further, a blockchain is a cryptographically-secured digital ledger, and its protocol is the software that governs rules, operations, and communications between computers interacting with the blockchain. Users can obtain or “mine” cryptocurrencies by verifying the blockchain identity of, say Bitcoins, used in an online transaction, acquire them as gifts or as payment for goods and
services from other users, or just purchase them on third-party exchanges.
The blockchain grows from the interaction between users, miners and nodes. Users contribute transactions by broadcasting
them to nodes. To create a block to add to the blockchain, miners compete to solve a cryptographic mathematic puzzle, called a “proof of work”, in order to collect a reward in bitcoins. Most notably, the Reserve Bank of India (“RBI”) has been a staunch and reluctant to recognise the concept of cryptocurrency. After repeatedly cautioning users of the various risks associated with
dealing in cryptocurrencies, in April 2018, RBI directed all regulated entities including banks to deny services to businesses dealing in virtual currencies, including cryptocurrencies. Besides regulatory actions, there have also been concerted efforts to “ban all private cryptocurrency”. Most notably, a bill in this regard was set to be placed before the Parliament in its winter session in late 2021. Though this bill has not been made public yet and was never actually placed before the Parliament, it disrupted the crypto ecosystem in India.
On the tax front too, there has been an immense lack of clarity. Back in 2021, Minister of State for Finance, Mr.Anurag Singh Thakur had said in response to a question in the Rajya Sabha that “the gains resulting from the transfer of cryptocurrencies/assets are subject to tax under the head of income, depending upon the nature of holding of the same”.
However, within a span of a year since this aforementioned statement, the Ministry of Finance took a completely different and
classification agnostic approach to taxing cryptocurrencies. In the Budget for the Financial Year 2022-23, the Finance Minister made four key amendments to the Income-tax Act, 1961 (“IT Act”).
The Finance Act 2022 inserted:
(i) Section 2(47A) to define virtual digital assets;
(ii) Section 115BBH that specifies the rate at which transfer of these ‘virtual digital assets’ will be
liable to income-tax, the rate of tax being 30 percent;
(iii) An explanation under clause (x) of section 56(2) to the effect that property would include
‘virtual digital asset’; and
(iv) Section 194S that provided for tax deduction at source on payment towards consideration for
transfer of virtual digital assets.
The above framework took effect from 1st April 2022. However, income-tax was payable on transactions in cryptocurrency prior to 1st April 2022 as well. The amount of tax payable was dependent on the classification of cryptocurrencies – either as a capital asset or as stock in trade. Tax on income from VDAS, a 30% tax on income from the transfer of a VDA is now applicable, which tax shall be in addition to the income tax payable on all other income of the assessee. Apart from the cost of acquisition of the VDA, no other deduction is permissible. Even losses incurred in such trade cannot be set off against taxable income. Payment on transfer of VDAS, the purchaser of a VDA is liable to deduct and deposit a withholding tax of 1% of the consideration amount. Where the consideration is in kind, wholly or partially (and the cash component is not sufficient to meet the threshold for deduction), the consideration shall not be released until tax on the complete consideration has been paid. Exemptions and thresholds have been defined for the benefit of certain categories, including individuals. Gift of VDAS, receipt of VDAS by an individual for no consideration or for a price that is at least INR 50,000/- (approx. USD 625) less than fair market value will be considered “income from other sources” in the hands of the recipient.
In the absence of any specific legislation, VDAS are neither regulated nor prohibited. Individuals and entities are permitted to hold, invest in, and transact VDAS, provided they comply with existing laws while doing so. Further, any bank or other entities regulated by RBI will need to carry out due diligence processes in line with existing laws and regulations applicable to financial service providers governed by RBI at tech-legal-group.
In August 2021, the Finance Minister stated in parliament that the Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these cryptoassets in financing illegitimate activities or as part of the payment system. Recently, on 18th July 2022, the Finance Minister remarked that before banning or regulating cryptocurrencies,
international collaboration would be required so as to prevent regulatory arbitrage, stating that any legislation for regulation or for banning can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.
In this context, note the judgment passed by the Supreme Court of India (“SCI”) in 2020 regarding the regulation of VDAS, wherein it specifically highlights the chimeric nature of VDAS. It is clear from the above that the governments and money market regulators throughout the world have come to terms with the reality that virtual currencies are capable of being used as real money, but all of them have gone into the denial mode (like the proverbial cat closing its eyes and thinking that there is complete darkness) by claiming that VCs do not have the status of a legal tender, as they are not backed by a central authority. But what an article of merchandise is capable of functioning as, is different from how it is recognized in law to be. It is as much true that VCs are not recognized aslegal tender, as it is true that they are capable of performing some or most of the functions of real currency.”
Frequently Asked Questions (FAQ)
Is Cryptocurrency regulated in India?
Cryptocurrency falls under the definition of Virtual Digital Asset (VDA) and these are neither prohibited nor recognised in India. People are allowed to buy, sell or trade these subject to the taxation law of India at security-tokens.
What are the tax rates on income generated from Virtual Digital Assets?
According to Section 115BBH of Income Tax Act, 1961 the tax is flat 30% on the income generated from the Virtual Digital Assets.
Are deductions permitted under income tax for loss against Virtual Digital Assets?No , there are no permissible deductions for loss against Virtual Digital Assets , the income tax act though has tax for income generated from VDAs but does not contain any such clause for deductions permitted.
Is gain from crypto divided into short or long term capital gains?
No in India the gain from cryptocurrencies are not divided into short or long term gains as only the profit from transfer is taxable at 30% .
Is GST applicable on Cryptocurrencies ?
A person doesn’t pay the GST on the value of cryptocurrency rather the platforms charges an 18% trading fees on their platforms.
Is there any penalty for not reporting cryptocurrency income?
According to Section 270A: If a person underreports the income a penalty of 200% of the tax
amount is imposed and reassessment penalty can go upto 70 % undisclosed income.
