by Pratha Khanna

The article discusses the legality of Virtual Digital Assets in India especially with the existence of various Cryptocurrencies such as Bitcoin etc. Further, the implication of tax liabilities as proposed through the recent Budget, 2022 is also understood by way of determining whether the Government deems Cryptocurrency as a valid VDA. The changes in the Indian economy and Crypto market is also explored post the applicability of the tax penalties on income earned through trade of Virtual Digital Assets along with discerning the pre-existing taxation laws on Cryptocurrencies across the globe. The article concludes by questioning the newly designed framework and the imposition of the same on the current Virtual Assets market. 

As we know, Digital Currencies have gained massive attraction in the last few years wherein these can be termed as virtual assets and primarily operate using Blockchain Technology. These crypto assets are decentralized in nature which makes them rather easy to custom innovate which is why today we have more than 18,000 cryptocurrencies also known as      Altcoins. However, the legality of Cryptocurrencies is still in question when even though the Supreme Court in February, 2022 asked the Central Government to clearly state whether the same can be considered as legal tender, the government  failed to make its stand clear on the same. Further, in the Budget 2022, the first step was taken in recognizing cryptocurrencies wherein the same were termed under Digital Virtual Assets thereby making income received by trading of the same, legal in nature. Through this Budget session, the Indian Government has added various features identifying Cryptocurrencies in a manner that would make any income or gain calculated through the same taxable under the Income Tax Act of India. Firstly, the Budget laid down that any income gained through the trade of cryptocurrencies and NFTs would be taxed at the rate of 30% for each assessment year (hereafter referred to as “AY”)  as incurred in the year preceding the AY.  This tax rate would be applied irrespective of short term or long-term gain and would be applied to any form of profit earned by the taxpayer either as business income or as income earned through other resources. The levying of this tax rate essentially implies that a 30% charge will be levied on any profit earned irrespective of the holding period. Secondly, the budget postulates that no deduction will be allowed to the taxpayer except the cost of acquisition while the return for taxes is being filed taking into account income earned through profit gained by cryptocurrencies. Thirdly, the Budget stated that loss that is incurred through trading of cryptocurrencies cannot be set off against any other income making it a separate and distinct branch of income in itself. Lastly, the Budget 2022 envisioned that any gifting of these crypto assets would attract tax liabilities in the hands of the receiver. This would entail further liabilities in the hands of the receiver making the trading of cryptocurrencies even more difficult and comprehensive in today’s era. Along with this, the Government also includes 1% TDS that may be deducted by the sourcing country i.e., India in this case.

Through enlisting of these regulations on trading of cryptocurrencies, we can correctly assume that the Indian economy is likely to face setbacks in a manner that various investors would feel trapped and stuck in the Indian tax regulatory framework. Moreover, blockchain technology as a whole is extremely progressive and any developing nation such as India must strive to include such advancements in a healthy and more accommodative manner. By inducing tax liabilities on various investors, the country has in a way made it more difficult for the Indian investor market to keep up with the global economy transactions in terms of Digital Assets. On the flip side, the addition of these tax liabilities on the consumers is likely to prove beneficial for the country at large as regulatory policies such as these in turn eliminate the possibility of tax evasion and black money accumulation. As mentioned before, Virtual Currencies as started through Bitcoin have now increased in quantity making it more difficult for the consumer market to trust and rely on such organizations. The Government of India through these tax penalties has induced consumers to be more careful about transactions involving virtual assets and has also cautioned inventor companies to beware of future regulatory actions on them as well. A key criticism to the Budget guidelines is that carrying forward losses is allowed in share trading in the Indian tax framework however, the same treatment has not been given to crypto trading which may hamper wider adoption of such trade practices and may hamper the development of the economy as a whole. Moreover, by making tax filing for income earned through trading of crypto assets compulsory, the Government has increased the unnecessary burden on both the assessee and the Income Tax Office. 

It may also be relevant to judge how cryptocurrency is taxed across the globe to determine whether the provisions laid down under Budget 2022 are viable for a developing economy or not. In the United States of America, cryptocurrency is treated as a Capital Gain thereby meaning that the same is only taxed in a situation where this currency is sold, transferred, or exchanged. The CRA in Canada treats Cryptocurrencies as Capital Assets thereby implying that the tax liability for the same would be exactly similar to capital gain taxations. In the United Kingdom, the stance is tilted towards an in between position wherein there is no specific Crypto tax and the tax liability of the same shall depend on the nature of the Crypto depending on whether it is an income or a capital gain. In Portugal on the other hand, cryptocurrency may not be taxed at all as the same is not seen as a capital gain thus making it entirely dependent on whether the tax department considers the gain as income or not. In Switzerland, Crypto is treated as stock and applies the same regulations as it would on any trade of shares by an individual. Singapore as an economy has very immaculately understood Cryptocurrency and has made specific notifications ensuring that these Virtual Assets are seen as legal tenders and are also regulated in a manner that would prevent laundering and other illegal monetary activities. 

Through the above worldwide policies on Cryptocurrency taxation, it is imperative to note that regulation and tax accumulation through earning of cryptocurrencies may prove beneficial for the Indian economy in a manner that it may prevent money laundering, shelving and other monetary offenses. However, the Government of India along with providing such clarifications should have first made its stance clear on whether they deem Digital Currencies such as these as legal tender or not and should further make concrete rules regulating the same. Through the 2022 Budget, it is amply clear that just like income earned through illegal activities, income earned through trading of Digital Virtual Assets would also now be taxed but would this in turn mean that trading of Cryptocurrencies is legal is a question that is still yet to be answered. Many individuals in India feel that over-regulation of Virtual Digital Assets may lead to a brain drain and could either result in a scenario where the industry would uproar in a manner that may be detrimental to the Indian economy. Considering that India is still at a beginner level in understanding the trading of Cryptocurrencies, it can safely be said that such tax imposition is likely to cause unrest in the market however, whether the same proves to be beneficial in the future or not is yet to be determined. 

Pratha Khanna is a Columnist of the Economics and Finance Cluster