Definitions hazy and questions aplenty over cryptocurrency tax, but here’s what you must know

VIRTUAL CURRENCIES: AN EXPLAINER

Ethereum, a cryptocurrency platform
Ethereum is a blockchain-powered platform, best known for its native cryptocurrency, called ether or ETH. Pic: Pixabay/CC0

To clear the air over speculation on the status of cryptocurrencies, Budget 2022 imposed a 30% tax on income from virtual digital assets (VDA) and announced the launch of digital rupee later this year. But, a few questions remain unanswered, especially on the definition of cryptocurrency. And what terms like blockchain and NFTs mean.

The concepts of fungible and non-fungible have been around for some time now. In economic terms, fungible tokens or assets are products which are non-unique and interchangeable with something of equivalent value. They are transferable, tangible in nature and their value remains constant. For example, a currency note of Rs 10 will have same the value wherever it is used in India. You could exchange a 10-rupee currency note with any asset of that same value. Similarly, a token for a metro ride is also fungible, as it can be used for any ride that costs the same amount paid for the token.

Non-fungible assets or tokens (NFTs), on the other hand, are assets or products which are unique, non-transferable and of variable value. They cannot be easily exchanged or traded with similar assets. An example, is say, an airline ticket. You couldn’t trade one flight ticket purchased with another, even on the same route and on the same day.

In the era of virtual digital assets, cryptocurrencies are fungible tokens, wherein the value of one Bitcoin remains the same everywhere. Other fungible tokens are Dogecoin, ERC-20, Litecoin etc. These are all digitised payment systems that are encrypted and decentralized using a software system called blockchain. However, unlike the exchange of money in the real world, cryptocurrency payments exist purely as digital entries in an online database describing specific transactions and are unregulated by the central banks of any nation.


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Non-fungible tokens, or NFTs, include data, intellectual property, gaming, artwork, musical creations, lottery ticket etc. These can be physical or intangible. They are created on another blockchain different from that of digital currencies. NFTs can create a marketplace for storing academic title and digital identities and other information, and can be easily traced.

The blockchain technology that both cryptocurrency and NFTs work on is an open, distributed ledger that records transactions in code known as the block. It is linked through a chain with previous transactions. In simple language, it is like a cheque book distributed across countless computers across the world which records and connects all payments made using these cheques.

These currencies are legal in the European Union, El Salvador has accepted them as legal tender, and Japan’s Payment Services Act defines Bitcoin as legal property. It can be used to buy a property and other assets in the virtual world. Companies like Wikipedia, Microsoft, AT&T services, etc. use Bitcoin or other cryptocurrencies to make payments.

RBI remains anti-crypto

Since 2013, the Reserve Bank of India has always maintained an anti virtual (or crypto) currency stance. It has regularly advised citizens to be careful while investing in this.

The RBI’s reasons: one, that virtual currency is highly volatile, two, it can destabilise the economy. And most importantly, since it is unregulated, transactions cannot be traced and can be used for illegal purposes.

Reserve Bank of India, Mumbai
The Reserve Bank of India, Mumbai has always been opposed to any virtual currency. Pic: Anurag Vijay/Wikimedia Commons (CC BY-SA 4.0)

In 2018, the RBI issued a circular to banks, asking them not to indulge in the virtual currency ecosystem. But a Supreme Court ruling on a writ petition under Internet and Mobile Association of India vs. Reserve Bank of India (2020) went against the RBI’s circular. The SC held that the circular was “disproportionate” because none of the RBI’s regulated entities had “suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC (virtual currency) exchanges had with any of them”.  Furthermore, the SC said that given the existing regulatory approaches in other jurisdictions, there were alternative regulatory means through which the RBI could have achieved its stated objectives.

In the recent budget, the government did not go into the legality and any regulatory measures on cryptocurrency transactions. Rather it imposed a tax at the rate of 30% on income from virtual digital assets (VDA). It also announced that India will have its own digital Rupee in 2022.

Taxation issues

The Finance Bill, 2022 amended Section 2(47) of the Income Tax Act, 1961 by introducing Clause 47A in Section 2 of the Act. The Act defines Virtual Digital Assets (VDA) as:

  1. Any information or code or number or token (not being Indian or foreign currency) which was generated through cryptographic means. It digitally represents value exchanged with or without consideration, having inherent value and can be transferred, stored or traded electronically.
  2. Non-fungible Token (NFT) or any token of similar nature will also be included in VDA
  3. Any other digital asset, as the Central Government may specify by notification in the Official Gazette.

For calculating the taxable income from VDAs, only the cost of acquisition is to be allowed as a deduction. No other expenditure (like transactional cost or interest cost of borrowing, etc.) is deductible. The basic exemption limit of Rs 2.5 lakh is not applicable on income from the transfer of cryptocurrencies. Also, if the transfer of VDA results in a loss, such loss can’t be set off against any other income, nor shall such loss be allowed to be carried forward to subsequent tax years.

During a financial year, if the total payment made to the seller of cryptocurrency by the crypto exchange or any other payer is above Rs 10,000, TDS of 1% shall be deducted on the payment. VDA as gifts will also be taxed if the value of such gift exceeds Rs 50,000. Such tax will be paid by the recipient.

As per the Act, gifts received from relatives, gifts received in marriage, gifts under will/inheritance will not be taxed. Taxable gifts include gifts received from friends, gifts received on birthdays, anniversaries, etc., or if the value of the gift exceeds Rs 50,000. Therefore, cryptos received as gifts under the taxable category will be taxed according to the new norms. These changes shall apply from April 2022.


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Uncertainties remain

Cryptocurrency is a relatively new technology that is unfamiliar to many. These initial steps related to VDA and taxation are welcome. But there remain grey areas that need to be clarified, particularly on the status of cryptocurrencies in India.

For instance, if a person pays for goods and services through crypto, will it be considered as a sale or mode of settlement? Will the purchaser of goods and services pay tax, if it is considered as transfer, and will the seller of goods and services deduct TDS? How will forex transactions be treated? Also, will GST apply to crypto and if so, in which category will they fall? Will the tax be charged on the development of such VDA?

Some experts say that by taxing the income from virtual digital assets, the government has legalised the usage and related cryptocurrency transactions. But according to the Supreme Court’s decision in Commissioner of Income Tax vs. S.C. Kothari (1967), it was held that where trade is illegal, it will be considered as trade within the meaning of the Income Tax Act and any profit derived through it, will be assessed for tax under the Act.

Applying this ruling in context of VDA, irrespective of nature of trade, if it is generating profits, sovereign authorities can enforce taxation on it. Hence, more clarity can only be achieved by further legislations on it.

The budget did not go into any details on it announcement of a digital rupee. That is obviously left for the future.

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About Utkarsha Srivastava 9 Articles
Utkarsha Srivastava is an advocate by profession, based in Delhi.