Crypto

Supporting Crypto Trade Without Tax Evasion

Although the 2022 Union budget puts cryptocurrencies under the net of direct taxation, their legal and regulatory status remains where they have always been – in unregulated territory. On February 1, Finance Minister Nirmala Sitharaman announced two things. The first, to launch an official cryptocurrency and the second, to levy a 30% tax on income from crypto assets starting April 1, 2022, in addition to a 1% TDS to discourage the crypto community. The first task has already started with the RBI launching a pilot digital rupee which is legal tender and not a cryptocurrency, which the central bank says poses a threat to the financial stability of the country. With just three months to go until the next budget, which will likely see crypto enter the soft tax net, the government must call time and define virtual digital assets once and for all.

But the problem is in its definition. Currently, GST law does not define crypto or virtual digital assets and must be classified as goods or services. According to the GST, goods include personal property but exclude money and securities. Although the services are nothing more than goods, money and securities, they include the use of money or the conversion of one currency into another, attracting commissions or interest. But digital assets are strictly neither considered money nor security and therefore need clarity. Elsewhere, cryptos are variously treated as property, currency, and commodities and are taxed accordingly. In other words, there is no universal way to tax cryptos, and India needs to chart its course when it comes to assessing crypto transactions and taxing them.

The regulatory journey of cryptocurrencies, from an outright ban in 2018 to the drafting of legislation last year, has come a long way. And if there is one distinctive element of cryptos, it is the speed at which they peak and fall. The asset class is so dangerously volatile that the total value of the global crypto market has fallen from its all-time high of $2.9 trillion in November 2021 to around $903 billion. Center’s cautious stance is understandable, but it must avoid the extent of under-the-table trading. For example, following the levy of income tax on cryptos, it is suspected that trading shifted to the gray market to avoid the taxman. A balanced approach encouraging participation is as essential as an effective tax structure to generate revenue and ensure the sustainability of the industry.

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