After months of skepticism, cryptocurrencies finally made their way into the 2022 budget, inviting mixed reactions. India has recently seen a significant increase in crypto adoption, making it a global leader in this field. However, there are still several gray areas that investors should be aware of.
The government has defined a new asset class – ‘Virtual Digital Assets’ – which includes cryptocurrencies and non-fungible tokens (NFTs). This has two major implications. First, by not defining cryptocurrencies separately, the Center does not recognize their merits as currencies, which was actually the primary reason for creating tokens like bitcoin. The government has made it very clear that it does not want to give cryptocurrency the equivalent of Indian Rupee. The second is that the definition of a virtual digital asset is so broad that it can include tokens, coins, reward points, credit card points, fungible tokens, etc. For example, Cred is famous for encouraging users by giving them credit coins. These can also be classified as virtual digital assets, as defined by the government.
The government has also decided to levy 30 per cent tax on all virtual digital asset transactions, whether short-term or long-term in nature.
Additionally, it clarified that losses on cryptocurrencies cannot be offset by profits from any other asset or business. Generally, if you are a regular stock market trader, you can offset the loss of one share against the profit of another share. As a professional trader, you can offset market losses against profits in any of your other businesses. The government has closed the door to such accounting with cryptocurrencies, and individuals are expected to suffer losses without the option of taking them further. This, along with the high tax rate, is enough to discourage some investors.
Another constraining factor is the one percent TDS (tax deducted at source) that will be levied on all transactions – even if you are transferring assets from one wallet to another, you will incur an additional cost. A key feature of digital assets is that transactions are free and efficient, but with TDS, people will think twice about the transaction. Taxation may deter small investors from getting on the crypto bandwagon, while providing some clarity to others. There is also the possibility that people will find ways to evade taxes, which will create more problems.
The delight of a large section of the public came from the idea that taxing cryptocurrencies leads to legalization of assets. There is no crypto bill yet that either legalizes or criminalizes cryptocurrencies, but it does not take away the government’s right to impose taxes. In fact, the Supreme Court has, in the past, allowed the government to tax illegal income. In a post-Budget interaction with the media, Finance Minister Nirmala Sitharaman categorically stated that taxation on virtual properties in no way means that they have been legalised. The issue of legality will be dealt with in the proposed cryptocurrency bill. Referring to RBI (Reserve Bank of India) he said that a currency can only be issued by a central bank, even if it is a cryptocurrency. Privately issued tokens, even though they are referred to as currencies, do not qualify. He clarified that since buying and selling was already taking place and since profits were being made in cryptocurrencies, no one was able to stop him from taxing them.
The last major announcement by the government was that the RBI would introduce a digital currency based on blockchain technology. The motivation for a digital currency issued by the RBI is yet to be clarified, and such a currency may not add much value to the Indian ecosystem for two reasons. Firstly, if the currency is centralized and controlled by the RBI, it cannot be called a cryptocurrency. The hallmark of cryptocurrencies is that they are decentralized and cannot be controlled by a single party. RBI’s proposal is just the opposite. Secondly, if the purpose of a digital currency is to offer an alternative to digital payments, there is no need to launch a new currency – which is already being done through Unified Payments Interface (UPI) and Paytm, Google Pay. being promoted. , PhonePe, etc. Therefore, much clarity still needs to emerge on India’s own digital currency.
Kunal Nandwani is the Co-Founder and CEO of UTrade Solutions
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