The cryptocurrency transactions are yet to be certified or recognized as legal tender on large scale. El Salvador is the only government to recognise cryptocurrency as a legal tender. The citizens of El Salvador can now use bitcoins to purchase products or services or to pay taxes instead of the United States Dollars (USD). This could potentially inspire other Latin American countries to adopt Bitcoin as a legal tender.
In India, budget 2022-23 proposed a 30% tax on the income generated from transactions of Virtual Digital Assets (VDA). Though, VDA is a classification club in a wide category, it is a start to include trading in the crypto space. In a way taxing a certain income source is rendering it a form of legitimate recognition. The RBI still remains apprehensive of the status that can be given to cryptocurrency, it seems more aligned to the concept of digital currency which the RBI can roll out.
LEGALITY OF CRYPTOCURRENCY
The Government introduced tax regulations with the commencement of Budget 2022 and inserted Section 2 (Clause 47A ) under the Income Tax Act 1961, which defines Virtual Digital Assets. Cryptocurrency is defined as a type of virtual digital asset that is not an Indian currency or a foreign currency under the requirements of the Foreign Exchange Management Act (FEMA) of 1999 and may be moved, stored, or exchanged online. The Finance Ministry reiterated that only Central Bank Digital Currencies (CBDCs) can be called as a currency and not a private cryptocurrency.
According to the Finance Bill, 2022, cryptocurrencies are classified as assets rather than property, and qualify for capital gains thus, any profits or gains made from trading them are subject to capital gains taxation under the Income Tax Act of 1961. The income tax administration has not yet provided any explanation on the tax consequences of crypto transaction profits.
CRYPTOCURRENCY AND TAX REGULATIONS
The tax rate of 30% (Section 115BBH) is applicable to income from cryptocurrency transfers. As regards the deduction – except for the cost of purchase, no expenditure will be recognized as a deduction. A set off for losses against any income is not allowed, and there is no carry forward of losses in this regard.
The Central Economic Intelligence Bureau (CEIB) has recommended classifying cryptocurrency as intangible assets and charging GST on all cryptocurrency transactions. Since the tax treatment and the plan is unspecified and still being debated, a universal rate of 18% GST may become applicable. If the sales exceed INR 20 L, GST may apply to business turnover.
A new section 194 S regulating TDS is planned to be included in the Income Tax Act, 1961, with effect from July 1, 2022. The TDS rate is set at 1% for all cryptocurrency and Virtual Digital Assets transactions. This has been introduced to track each digital asset transaction taking place on cryptocurrency exchanges. This clarity for cryptocurrency has been a long overdue acknowledgement for the sector.
The regularisation of cryptocurrency through legislations is not too far for India. The right set of regulations will require the interplay of digital services and captive digital currency, cross-border tax, data protection and security laws, asset classification, bans and restrictions. The United States of America has already classified cryptocurrency as Digital Asset under Infrastructure Investment and Jobs Act. It mandates reporting to the US Internal Revenue Service of all digital asset transfers from one account/address to another, by broker. This alters the status of cryptocurrency from a medium of exchange to being comparable to shares and gold, but virtually. It remains to be seen how GoI proposes to regulate private cryptocurrency and integrate it with the use of blockchain technology in the country.
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