Abstract
Cryptocurrencies, categorized as Virtual Digital Assets (VDAs), were previously untaxed in India. However, the 2022 budget established a comprehensive tax structure for these assets, including crypto mining, staking, and Initial Coin Offerings (ICOs), imposing a 30% tax rate on profits and a 1% tax deducted at source for specific transactions. There are also various challenges and concerns faced by investors and businesses due to these regulations, such as the non-recognition of cryptocurrency losses, complex tax filing processes, and the potential discouragement of participation in the sector. The inclusion of the crypto sector under the PMLA empowers the government to combat illegal crypto activities more effectively, but it also raises issues related to compliance and the absence of a central regulator.
These regulatory framework will be discussed in detail in this article. Further, this article will also be highlighting various challenges and issues faced by investors and businesses due to these regulatory framework.
Introduction
Cryptocurrencies can be categorised as “Virtual Digital Assets” (VDAs). These assets even though do not exist in physical form, they hold significant value in terms of taxation. Some examples of VDAs are Bitcoin and Ethereum. Before 2022, there were no regulatory framework dealing with crypto sector in India by establishing a comprehensive tax structure for these assets, including crypto mining, staking, and Initial Coin Offerings (ICOs), imposing a 30% tax rate on profits and a 1% tax deducted at source for specific transactions. The 2022 union budget brought out framework for taxation of crypto and hence, acknowledging the crypto sector. Further, in order to promote transparent dealing in crypto, the government brought the ambit of crypto under the PMLA.
Regulations governing taxation of cryptocurrency in India
NFT and cryptocurrency are categorized as “Virtual Digital Assets,” and the Income Tax Act now includes section 2(47A) that defines this term. The term encompasses a wide range of data, codes, numbers, and symbols (except foreign or Indian currency) that are obtained by cryptographic techniques. To put it simply, VDA refers to all the cryptocurrency assets, including tokens, NFTs, and cryptocurrencies, however, gift cards and passes are not included in it. Profits or gains accruing from Cryptocurrency are taxable in India. As Cryptocurrency and NFTs are classified as Virtual Digital Assets, their taxation was majorly dealt with by the Government in the Union Budget of 2022.
- Union Budget 2022
Before the 2022 union budget, there were no regulatory framework to govern the taxation of cryptocurrency in India. Hence, they were not liable to be taxed in India. 2022 regulation brought out a framework to include the profits arising from cryptocurrency into the taxation system of India. Any profit arising from trading, selling, or swapping of cryptocurrencies on or after 1 April, 2022 will be subjected to taxes in India. According to Section 115BBH, any such gains from cryptocurrency are to be taxed at 30% (plus 4% cess). Further, as per Section 194S, if there is any transfer of crypto amounting Rs. 50000 or Rs. 10,000 on or after 1 July 2022, they will be subjected to a tax deducted at source (TDS) at 1%. The cryptocurrencies that are given as a present are also subjected to tax provided that the value of the crypto exceeds Rs. 50,000.
Crypto mining are also subjected to tax. They are to be taxed according to the income tax slab rate. They can be considered as income arising from business or any other source depending on the type of crypto mining. Crypto staking is also liable to be taxed. It refers to the profits earned for holding and validating transactions on a blockchain network. Crypto staking is also taxed as per the income tax slab rate and are to be considered as income arising from other sources. Further, the salaries received in the form of cryptocurrencies are also taxable and are to be taxed as per the income tax slab rate. Token sales in India, whether they be Initial Coin Offerings (ICOs) or Initial DEX Offerings (IDOs), are taxable in nature. Income from VDAs, including tokens obtained through ICOs and IDOs, is subject to a 30% tax.
The Union budget not only dealt with the taxation of crypto but also dealt with the taxation of Non-fungible tokens (NFTs). Purchasing NFTs with fiat cash does not incur taxation, but doing so with cryptocurrencies does[1]. As of April 01, 2022, a 1% TDS will be deducted from the sale price of any NFTs made.
2. Prevention of Money Laundering Act
The Union government subjected the cryptocurrency industry to the PMLA (Prevention of Money Laundering Act) on March 7, 2023[2]. Under this act, the Government has the power to confiscate property earned by illegal means and by money laundering. Here, the burden is conferred upon the accused. This act by the government to bring the scope of crypto under the PMLA will have several implications in the digital assets sector.
Under the act, various types of transaction that will be covered under the PMLA were enumerated:
- Exchange between virtual digital assets and fiat currencies.
- Exchange between one or more forms of virtual digital assets.
- Transfer of virtual digital assets.
- Safekeeping of virtual digital assets.
- Provision of financial services related to an issuer’s offer.
- Sale of a virtual digital asset.
The Income Tax Department and the Enforcement Directorate have investigated, or are investigating, a number of cases involving bitcoin exchanges and transactions[3]. Hence, This act by the government will help in nabbing various crypto businesses and investors that indulge in illegal crypto mining and business.
Challenges for Investors and Businesses
From 2022 onwards, crypto were liable to be taxed. All the profits that arise from crypto will be subjected to tax. However, under the crypto taxation, losses are not acknowledged. Given the dynamic nature of cryptocurrency, wherein losses are more prevalent than profits, it can be challenging for the investors and firms to deal with the taxation of crypto. Further, the 1% TDS (tax deducted at source) doesn’t make high-frequency trading feasible in India. Even the filing process of TDS is very complex which can further hinder the businesses and investors dealing with crypto. Heavy tax on crypto can further discourage various investors and businesses from dealing in this sector or various underground and illegal crypto businesses might prop up. There are also worries among the investors and crypto firms that the act of bringing crypto sector into the PMLA gives these organizations insufficient time to follow the new guidelines. The sector is also worried that cryptocurrency businesses may have to deal with law enforcement organizations like the ED directly in the absence of a central regulator which can prove be disadvantageous for these businesses. In order to ensure smooth functioning of crypto sector, it is essential to address all these inherent issues in this sector.
Conclusion
Before 2022, there were no regulatory framework dealing with crypto sector in India. The 2022 union budget brought out framework for taxation of crypto and hence, acknowledging the crypto sector. Further, in order to promote transparent dealing in crypto, the government brought the ambit of crypto under the PMLA. While these regulatory measures aim to bring transparency and accountability to the crypto sector, they pose several challenges for investors and businesses such as lack of acknowledgement of crypto losses, high taxation, etc. To ensure the continued growth and stability of the cryptocurrency and NFT markets in India, it is crucial to address these challenges and strike a balance between regulatory oversight and facilitating legitimate business activities. Furthermore, establishing a regulatory body to oversee the sector could help create a more conducive and secure environment for all stakeholders involved.
[1] Punit Agarwal, ‘Keeping up with the regulations: The complete roundup of crypto tax rules in India’, Times of India, OCT 28, 2023, https://timesofindia.indiatimes.com/blogs/voices/keeping-up-with-the-regulations-the-complete-roundup-of-crypto-tax-rules-in-india/
[2] Vikram Subburaj, ‘Navigating the complexities of crypto taxation in India’, livemint, 25 Mar 2023, https://www.livemint.com/market/cryptocurrency/navigating-the-complexities-of-crypto-taxation-in-india-11679764005839.htmln
[3] Aanchal Magazine , Soumyarendra Barik, ‘Finance Ministry brings crypto assets under Prevention of Money Laundering Act: What are the implications?, The Indian Express, March 10, 2023, https://indianexpress.com/article/explained/explained-economics/crypto-assets-pmla-explained-8486629/
