CRYPTOCURRENCY REGULATION AND TAXATION IN INDIA

In India, when it comes to cryptocurrency, the asset class picked up momentum in 2017. Until then, it only had access to the top two coins, Bitcoin & Ethereum, on a selected few platforms. In 2017, exchanges gained traction and opened a channel to bring in more than the top few digital assets. Amidst the growing trends of cryptocurrencies, CBI always held a critical opinion on cryptocurrency being banned in India, but they never went ahead, and no laws have been made in such a line so far.?

On 6th April 2018, the RBI issued a circular barring crypto transactions from all banks. They had not outlawed it but basically removed the crypto platform and exchanged bank accounts from the country’s banking system, which in a way, made it impossible for existing users and new users, especially, to use the Indian Rupee and buy crypto. Hence, this became incomprehensible for the crypto ecosystem to operate in India. The idea behind it was that you could trade it but couldn't truly buy it, and the lack of regulation always kept Indians at bay.

Until now, we never had any regulation on how to formulate the industry or whether we climb down on it, but something interesting happened earlier this year in February. The Indian government announced that crypto transactions and income from crypto assets would be taxed in the country. This was actually seen as the first step toward regulation, and people welcomed the move because taxing any asset, for that matter, is always seen as a sign of legitimation.

So what did the ‘Union Budget 2022’ change for the crypto ecosystem in India?

The crypto regulation has brought along a flat 30% tax liability on income from Crypto assets. So regardless of what income bracket one falls into or how much money one makes in a year, the taxpayer is not allowed any deduction from the booked profit on the sale of crypto assets except the acquisition cost. The taxpayer cannot set off their losses against the annual gain either. The taxpayer is not allowed any deduction from the crypto asset’s sale price except the cost of acquisition. The government recently clarified that the mining infrastructure costs would not be included in the acquisition cost calculation. According to Shrikant B. , founder and CEO of Seracle, “The tax move is a huge step for the Indian crypto ecosystem as it’s the first sign of its acceptance. However, the tax percentage proposed is rather stringent and can potentially hamper the pace of the blockchain ecosystem. The Indian startup ecosystem is surprisingly agile, and with time, the crypto startups will find a way to increase engagement while adhering to the regulatory requirements.”?

Shrikant B. advised cryptocurrency investors to determine their advance tax liability after taking into account the tax on income from the transfer of cryptocurrencies and NFTs and then pay the advance tax installments in accordance with that calculation.

The government has also introduced 1% TDS or the tax, which will be deducted at source on all digital asset transactions. Our organization has already found a better solution for the users to ease this problem, ‘Our platform facilitates this feature where the exchanges will make a receipt of all the transactions and how much tax it incurs according to the trading; they are generating TDS receipts for the users.

Challenges with Indian crypto tax regulations

• Offset any loss - There is no tax benefit for Indian investors because one cannot offset any loss in a crypto asset from any other income, not even income from a separate crypto token;? Losses incurred from one virtual digital currency cannot be set off against income from another digital currency. "You cannot deduct the profit on the transfer of NFTs from the loss on the transfer of Bitcoin if you have both a profit and a loss on the transfer of Bitcoin. Profits from NFT transfers will be taxed at a fixed rate of 30%." ?legal counsel stated.
• No carryforward is permitted under the crypto tax rule. Taxpayer losses from cryptocurrencies are not permitted to be carried forward under the crypto tax rules. The act says, "You cannot carry forward a loss from the transfer of cryptocurrency to the following year to offset future gains."?

Are gifts and airdrops spared from the tax regime?

Well, not really! Crypto received as a gift is taxable under the new regulation. Gifting of digital assets will attract tax in the hands of the receiver. The government has also broadened the definition of "specified movable assets" to include "virtual digital assets." This includes taxes on cryptocurrency received as gifts. As a result, gifts received in the form of cryptocurrency assets would be subject to taxation if their fair market value exceeded Rs 50,000. However, according to Shrikant Bhalerao, a gift received from family members or on particular occasions will be free from tax within the simple meaning of the regulations governing cryptocurrency taxes.

Additionally, Crypto/NFT Airdrops, or Gaming Coins, which are a popular method used by cryptocurrency and NFT businesses to publicize the beginning of their projects, will be taxed too. According to the Income Tax Act framework, such crypto airdrops or coins obtained through gambling may be regarded as gifts, and as such, the recipient is subject to taxation. When you receive an email with a coupon code, that is how airdrops work.

As per Section 206AB of the Income-Tax Act, 1961:

1. If any user has not filed their Income Tax Return in the last two years and the amount of TDS is ?50,000 or more in each of these two previous years, then the tax (TDS) to be deducted for Crypto-related transactions will be 5%.
2. If an order is placed before 1st July 2022, but the trade is executed on or after 1st July 2022, TDS provisions will apply.

In conclusion, any technology that can change the face of a system would come with some inherent risks; however, regulation is always a better approach than banning them outright. With the crypto bill, India has chosen a better way out. We are still waiting for formal regulations around crypto assets in India even though the tax regime has been announced, and the government has said that this does not mean the crypto asset is legalized in India; they are saying that as a Government of India, we have the right to tax you on this income said, ?legal counsel. The Finance Minister also said that by 2023, a Blockchain-based and RBI-backed Central Bank Digital Currency (CBDC) will be introduced.?