By – Sharanya Ranga & Farshad Ali
’Crypto Tax’ has been the buzzword following the unveiling of India’s Union Budget for 2022! While a cryptocurrency bill proposing to ban and criminalise the investment and trading of cryptocurrencies has been in the pipeline since 2019, the Budget has introduced, in an unexpected move, a capital gains tax on the transfer (by way of sale, exchange, or gift) of virtual digital assets such as cryptocurrencies and non-fungible tokens (NFT). While cryptocurrencies are not recognised as legal tender, this proposal opens the gate to treating cryptocurrencies and other virtual digital assets as capital assets thereby bringing them under the tax bracket. Hence, from April 1, 2023, any income arising from the transfer of virtual digital assets will attract capital gains tax at the rate of 30%.
The framework proposed for taxation of gains arising from virtual digital assets differs from taxation of gains arising from other classes of capital assets. For instance, the expenses associated with acquiring, holding or selling virtual digital assets are not deductible from the gains arising from their transfer when determining the tax incidence. Also, any losses suffered on the transfer of any such assets may not be treated as a capital loss capable of being adjusted against any capital gains, or other forms of income (such as from salary, from a business or profession, or from a housing property, etc.). Hence, the benefit of carrying forward and adjustment of capital losses over the subsequent eight financial years, which is afforded to other classes of capital assets, will not apply to virtual digital assets. Additionally, the inability to setoff capital losses against gains would also render high volume algo-trading / arbitrage unfeasible.
In the Indian context, trading of virtual digital assets invariably happens in overseas exchanges. The value of such assets is not linked to any underlying government issued currency or commonly traded commodity, and is thus highly volatile and impacted by the continuous and rapid evolution of government restrictions or regulation of such assets, and global market sentiments. We may thus infer that this distinct treatment of virtual digital assets, vis-à-vis adjustment of capital expenses and losses, points to the Government’s efforts to discourage the sale of virtual assets at a loss, such as those arising from flash sales of such asset holdings induced by rapid downward fluctuations in the traded price for such assets. Another practical challenge lies in the sheer inability of the Government to monitor or cross-verify digital holdings and transactions against the figures disclosed by tax assessees, who may indulge in selective disclosure of their transactions and holdings. The rate of 30% would certainly impact both investors and traders of digital virtual assets, as the rate is applicable across the board and does not distinguish between short and long term capital gains.
Additionally, a withholding tax at the rate of 1% will be applicable on the payment of sale consideration for virtual digital assets, should such consideration cumulatively exceed INR 10,000/- in any financial year. Further, gifting of virtual digital assets would also be taxable, presumably as per the prices of such assets reflected in mainstream indexes, or at fair market value or ready reckoner rates determined by the Government from time to time. This approach may not however be practical for determining the value of NFTs, which are non-fungible (i.e., non-interchangeable) by nature and the value of each token is independent of that of other tokens.
Separately, the Government has announced that the Reserve Bank of India (RBI), i.e., India’s central bank, shall roll out a Central Bank Digital Currency (CBDC) based on ‘Blockchain’ technology. The CBDC shall be a digital form of the Indian Rupee regulated by the RBI. In a significant departure from other major cryptocurrencies currently in circulation, the CBDC will not operate in a decentralised manner. Presently only Nigeria, the Bahamas and some Eastern Caribbean countries have rolled out CBDCs, while several other developed countries including Sweden, China, Singapore, Malaysia, Canada, Russia and Australia are at various stages of research, development and testing of CBDCs.