The 30% tax on cryptocurrency earnings has evoked a mixed reaction from Indians. Some believe that the 30% rate on cryptocurrencies means that the government equates it to speculation and speculation. A petition seeking cancellation of 30% received an initial target of 50,000 signatures within hours of the commencement of the petition. Some are relieved that at least a framework has been put in place to tax cryptocurrencies. But for most, the 30% tax was the easier choice between the two evils – the other being an outright ban. Transactions in cryptocurrencies in India are legal as long as regulation does not make it illegal. Tax law, by nature, cannot legalize transactions or goods. Even without regulatory clarity, tax laws continue to apply. So the understanding is flawed that India has proposed a tax on cryptocurrencies and therefore legalized it.
Section 2(47A) of the Finance Bill seeks to define a ‘Virtual Digital Asset’ (VDA) as any information, code, number or token generated through cryptographic means or otherwise. The definition is broad enough to cover cryptocurrencies as we know them today and to account for future developments in the crypto ecosystem.
Money transactions are not liable to IT and logically, Indian and foreign currencies are excluded from the VDA. There is almost unanimous voice to never give currency status to cryptocurrency including RBI. The adoption of bitcoin as legal tender by El Salvador caused some confusion as to whether the VDA definition would fail to cover bitcoin and consequently also fail to tax transfer of the same. Mostly because foreign exchange under FEMA means any ‘currency’ other than Indian currency. Bitcoin is the most popular currency in India. Therefore, not taxing bitcoin transfers renders the entire crypto taxation framework useless and is certainly not a legislative intent. Even though bitcoin is legal tender in other countries, any instrument must first be a currency and only then can it be a foreign currency.
Only NFTs specifically notified by the Government will be covered by the VDA.
The first approach seems quite tedious as each NFT has to be notified first and only then can it be taxed. The second approach of characterization seems probable. As interesting as it will be to see what features will be prescribed for NFTs in the notification, time is of the essence. Unless a notification is issued about these features, they cannot be taxed at 30%.
Unexpected victims of the definition are debit card or credit card holders who earn reward points generated electronically. Generally, not taxable, but based on the broad definition of VDAs, experts think they can be taxed.
A classification neutral approach has been adopted for taxing VDAs. As per the proposed section 115BBH, with effect from April 2022,
Any income from transfer to any VDA will be taxed at 30%
No deduction will be available other than the cost of acquisition
Not carrying forward or setting off loss of income arising from transfer from VDA
But will the ‘transfer’ include coin rewards for mining and staking? On Ethereum or Bitcoin, when a user writes and signs a transaction, miners validate the transaction by solving complex computational puzzles. These miners are sometimes paid a mining reward in the form of coins. The coins are not paid out by any institution but won over the network. Therefore, there is no transfer or transferee per se. It seems that only secondary transfers of tokens are taxable and not mined/staking.
Bitcoin started out as a political project and became only a financial project much later. There is still a section of bitcoin enthusiasts who firmly believe that bitcoin or the blockchain should not be fully regulated or taxed. However, this is a far-fetched dream and what can be controlled is how fairly it can be regulated or taxed. In order to create a more robust taxation framework for cryptocurrencies, the government should:
1. Clarify whether or not cryptocurrencies are recognized as legal tender in other jurisdictions will be covered by the VDA’s definition.
2. Clarify whether mining rewards in the form of coins are taxable under section 115BBH
3. Preferably, notify the features of NFTs which will be covered under the definition of VDA
4. Introduce a framework for taxing cryptocurrencies under the Goods and Services Tax Act to provide tax certainty.
Yesha Shriyan is a Research Fellow in Tax Law at the Vidhi Center for Legal Policy.
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