Taxation of Cryptocurrency: Cryptic or Clear?

Govt’s proposal is being interpreted as intention to legalise it in near future

Amidst the recent rise in the use of digital assets, the Finance Minister of India, Nirmala Sitharaman, in her Budget speech for Financial Year 2022-23 has announced a new taxation framework to be applicable on such assets. Clarity on the taxation of cryptocurrency is welcome step and will aid the understanding of the industry on the applicable tax implications.

At the outset, the term ‘virtual digital assets’ has been proposed to include (i) any information, code, number or token generated through cryptographic means or otherwise; (ii) to be notified non-fungible tokens; and (iii) other to be notified digital assets. Hence, cryptocurrencies i.e. decentralised virtual currencies based on cryptographic protection would fall squarely within the ambit of the proposed term. However, it is pertinent to note that both, Indian currency and foreign currency has been expressly excluded from the proposed definition of virtual digital assets.

Accordingly, cryptocurrencies such as Bitcoin that have been recognised as a legal tender in certain jurisdictions may be equated with the foreign currency of those jurisdictions and thereby fall outside the Indian taxation framework.

Therefore, from April 1, 2022, 30% tax (plus applicable surcharge and cess) will be applicable on transactions that involve transfer of cryptocurrency. Further, no deduction of expenses (except cost of acquisition) or carry forward of losses shall be allowed in the hands of the taxpayer; and the receipt of cryptocurrency for nil or inadequate consideration will be taxable in the hands of the recipient subject to certain exceptions.

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Additionally, from 1st July 2022 onwards, any person paying consideration to a resident of India in exchange for cryptocurrency shall be obligated to withhold tax at the rate of 1% on the consideration so paid, subject to certain monetary thresholds. Where the consideration payable is wholly or partly in-kind, then the payer must ensure that tax is paid in respect of such transaction, before paying the consideration. From a withholding tax compliance perspective, there may be certain practical challenges, especially for traders of cryptocurrency, such as keeping a record of the identity or tax residence of sellers etc.

Interestingly, the proposal to tax cryptocurrency is being interpreted by the market as an indicator of Government’s intention to legally recognise cryptocurrencies in the near future.

The Government has adopted a simplified regime of levying a standard rate of tax on all types of transactions. This will help in reducing ambiguity and litigation. However, on the other hand, adopting a standard rate may disrupt the cryptocurrency industry as a high tax rate will be applicable on every transfer.

The Government should consider setting up an expert committee to study the nuances of the cryptocurrency ecosystem and accordingly suggest tweaks to the proposed tax framework; clarify whether creation and initial acquisition of tokens will be treated as taxable events; and clarify the manner of valuation of virtual digital assets including cryptocurrency.

(The writer is a Research Fellow (Tax Law) at Vidhi Centre for Legal Policy)

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