I. Introduction
The Indian government took its stance on crypto taxes a year back. After implementing a 30% tax on crypto assets, the crypto industry in India finally got recognized country-wide.
Talking about the specifics, the government of India stated in the 2022 Budget that if you trade, sell, or spend crypto, you will be subject to a 30% tax on profits. Additionally, if you sell crypto assets for more than INR 50,000 or INR 10,000, as applicable, in a single financial year, you will be subject to a 1% TDS (Tax Deducted at Source).
These tax compliances are equally applicable and affect businesses and individuals involved in crypto sales and trades. Anytime you transfer your crypto, you’re charged 1% on every transaction. This tax on any revenue related to crypto was implemented throughout the country on July 1, 2022.
However, even if the 2023 budget didn’t really bring any relaxation to the existing taxation landscape, it still emphasized a little more on the TDS.
As the use of cryptocurrencies increases, governments around the world have different stances on how to handle the associated taxes. It’s important to understand the government’s stance and approach to taxation before you even step foot into the industry.
Governments around the world are still struggling to come up with a unified approach to the taxation of cryptocurrencies. But regardless of the stance of the government, it is important to be aware of the various taxes associated with investing in cryptocurrencies. This can help investors make informed decisions and maximize the financial success of their investments.
II. History of Crypto Regulations in India
Even though we’re witnessing major changes in the crypto industry now, the truth is that the battle between crypto and regulations has been going on for more than a decade.
- The year 2008 came with Bitcoin and it grew globally till 2013.
- Right in 2013, the RBI issued its first circular regarding cryptos and cautioned people about the risks associated with crypto.
- In 2018, RBI came out with a circular that restrains banks and other payment systems from dealing with virtual currencies.
- Fast forward to 2020, the Supreme Court of India struck down the crypto banking ban, declaring the RBI circular unconstitutional.
- At the beginning of 2021, the government announced that it will be introducing a bill to create a sovereign digital currency. Toward the end of 2021, the government concluded that rather than banning crypto, it would be regulated.
- And then finally in the 2022 Budget, the 30% taxation and 1% TDS was introduced.
However, the key point is that despite such a long battle, cryptos are still not regulated in India.
III. Indian Government’s Current Stance on Crypto Taxes
The 2022 Budget of India made itself very clear on the taxation front.
The new crypto tax India regime not only introduced a 30% tax on profits but even gave the crypto investors a 1% TDS to adhere to.
These crypto taxes are applicable to some areas, like your profits, but don’t exactly shed light on areas related to crypto mining or minting tokens in India. Additionally, there may be numerous potential tax repercussions for trading in DeFi activities. This has also led to the government being criticized for not providing enough guidance and clarity on how crypto-related gains should be taxed and what the most appropriate characterization for cryptocurrencies should be.
In order to properly analyze the potential benefits and drawbacks of cryptocurrency taxation, it is important to consider the various factors that may be affected.
Taxation can be used to monitor and regulate the cryptocurrency market, which is an important factor in preventing money laundering, fraud, and other criminal activities.
- These taxes can ensure that funds aren’t being used for illegal activities and that there’s proper stability in the market.
- Not just that but the taxes collected could be re-invested by the government to fund more technological developments in the industry.
- This taxation can also help stabilize the market by discouraging speculation and manipulation. By taxing cryptocurrency trades, people will be less likely to buy and sell cryptocurrencies for short-term gains and instead focus on long-term crypto-investments.
However, the presence of taxes and extra regulations also takes away a little bit of purpose from cryptos. Cryptos are decentralized and are meant to be that way, at least.
While the taxation of cryptocurrency can provide many benefits, it can also potentially have negative consequences, such as discouraging investment and preventing innovation. The taxation of crypto-related gains might have to align with the existing taxation principles that we have in the country. Therefore, it is important for governments to carefully assess the potential risks and rewards of cryptocurrency taxation before implementing any new regulations.
IV. Implications of the Indian Government’s Stance on Crypto Taxes
The crypto taxes in India undoubtedly came as a surprise, even one of those we least expected (or wanted).
Since the Indian government has made it clear that cryptocurrencies must be taxed, this has caused confusion among people involved in the space. Why? because of the technicalities involved!
Back in 2021, the Indian government presented the draft of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. This bill stated that taxes on cryptocurrency transactions must be paid in Indian rupees and that digital currency exchanges must register with the central bank and comply with taxation laws. However, this bill wasn’t passed and isn’t a law.
In a country where only 5% of the population pays taxes, paying taxes on cryptos is a new problem that people don’t exactly want to deal with.
Crypto traders and investors in India are uncertain about their future and are unsure of how to proceed. They are now taking a more cautious approach, as they don’t want to risk getting caught up in a tax nightmare.
The Indian government’s stance on crypto taxes has been a major factor in the uncertainty that has been felt by those investing in cryptocurrencies in India. It has created confusion and caused traders and investors to be more cautious when dealing with digital currencies. This has had a detrimental impact on the industry, and it remains to be seen how the government’s stance on crypto taxes will affect the Indian crypto market in the future.
For example, since the country introduced crypto taxation in 2022, more than $3.8B has been moved to foreign exchanges by Indian crypto investors.
V. Conclusion
Even though taxation of crypto assets paves the way for a more robust regulatory framework in India, it still isn’t enough for everybody to place faith in the entire industry from a legal perspective.
India is looking to the IMF and FSB to provide consultations about regulating crypto assets during its G-20 presidency. The plan is to establish a global regulatory framework around crypto.
At the G20 summit, Indian Finance Minister Nirmala Sitharaman announced that India will encourage collective efforts for global regulation of crypto assets to counter terror financing.
India plans to focus more on the development of a very sustainable framework for global regulation of unbacked crypto assets, stablecoins, and decentralized finance.
The introduction of the 30 percent tax and 1 percent TDS seems final – at least for now. Even though the ITD views virtual digital assets like Bitcoin and other cryptocurrencies as investments rather than currencies, what matters right now is the acknowledgment of these digital assets by the authorities.
India is one of the leading countries in terms of crypto growth. We have our very own digital currency issued by the RBI too, and we have hundreds of crypto startups that are rapidly advancing towards a more developed web3 industry.
Despite the Supreme Court’s decision, the Indian government has not yet specified a clear-cut regulatory framework for cryptocurrency trading. Currently, the government is working on a draft bill that would seek to ban private cryptocurrencies, while introducing a regulatory framework for the use of public cryptocurrencies.
It is expected that the draft bill will propose a regulatory framework that would balance the need for security and investor protection while allowing for the growth of the sector.
In the meantime, the government is taking a cautious approach to cryptocurrency by creating a registry of entities involved in cryptocurrency trading and examining the technology behind cryptocurrencies. It is hoped that the government will soon put in place a robust and comprehensive regulatory framework that will provide the necessary support and guidance to the industry, while ensuring that investors and users of cryptocurrency are adequately protected.
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The article is drafted by Mr Punit Agarwal-Founder KoinX
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency trading involves high risk, and is not suitable for all investors. Before deciding to trade cryptocurrencies, tokens or any other digital asset you should carefully consider your investment objectives, level of experience, and risk appetite. TaxGuru does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions. By the use of the above information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.
