Fuzzy definitions and many cryptocurrency tax questions, but here’s what you need to know
To dispel speculation about the status of cryptocurrencies, the 2022 budget imposed a 30% tax on income from virtual digital assets (VDAs) and announced the launch of the digital rupee later this year. But, some questions remain unanswered, especially on the definition of cryptocurrency. And what terms like blockchain and NFT mean.
The concepts of fungible and non-fungible have been around for quite some time. In economic terms, tokens or fungible assets are commodities that are not unique and interchangeable with something of equivalent value. They are transferable, tangible in nature and their value remains constant. For example, a banknote of Rs 10 will have the same value wherever it is used in India. You can exchange a 10 rupee note with any asset of the same value. Similarly, a token for a subway ride is also fungible, as it can be used for any ride that costs the same amount paid for the token.
Non-Fungible Assets or Tokens (NFTs), on the other hand, are unique, non-transferable assets or commodities of variable value. They cannot be easily exchanged or traded with similar assets. An example, say, a plane ticket. You could not exchange a purchased plane ticket with another, even on the same route and on the same day.
In the era of virtual digital assets, cryptocurrencies are fungible tokens, in which the value of a Bitcoin remains the same everywhere. Other fungible tokens are Dogecoin, ERC-20, Litecoin, etc. These are all digitized payment systems that are encrypted and decentralized using a software system called blockchain. However, unlike the real-world exchange of money, cryptocurrency payments exist only as digital entries in an online database describing specific transactions and are not regulated by the central banks of Europe. no nation.
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Non-fungible tokens, or NFTs, include data, intellectual property, games, artwork, musical creations, lottery tickets, and more. These can be physical or intangible. They are created on another blockchain different from that of digital currencies. NFTs can create a market for storing academic credentials and digital identities and other information, and can be easily traced.
The blockchain technology that both cryptocurrency and NFTs run on is an open, distributed ledger that records transactions in a code known as a block. It is linked by a chain to previous transactions. Simply put, it’s like a checkbook distributed on countless computers around the world that records and links all payments made using those checks.
These currencies are legal in the European Union, El Salvador has accepted them as legal tender, and the Japanese Payment Services Law defines Bitcoin as legal property. It can be used to purchase property and other assets in the virtual world. Companies like Wikipedia, Microsoft, AT&T Services, etc. use Bitcoin or other cryptocurrencies to make payments.
RBI remains anti-crypto
Since 2013, the Reserve Bank of India has always maintained an anti-virtual (or crypto) currency stance. He has regularly advised citizens to be careful when investing in this area.
The reasons for the RBI: firstly, this virtual currency is very volatile, secondly, it can destabilize the economy. And most importantly, as it is unregulated, transactions cannot be traced and can be used for illegal purposes.
In 2018, the RBI issued a circular to banks, asking them not to indulge in the virtual currency ecosystem. But a Supreme Court decision on a writ petition under Internet and Mobile Association of India v Reserve Bank of India (2020) went against the RBI circular. The SC found the circular to be “disproportionate” as none of the RBI regulated entities had “suffered any loss or adverse effect directly or indirectly, as a result of the interface that VC (virtual currency) exchanges had with one of them”. Further, the SC stated that given existing regulatory approaches in other jurisdictions, there were other regulatory means by which the RBI could have achieved its stated objectives.
In the recent budget, the government failed to go into legalities and regulatory measures on cryptocurrency transactions. Instead, it imposed a tax at the rate of 30% on income from virtual digital assets (VDAs). He also announced that India will have its own digital rupee in 2022.
Tax issues
The Finance Bill 2022 amended Section 2(47) of the Income Tax Act 1961 by introducing clause 47A into Section 2 of the Act. The law defines virtual digital assets (VDAs) as:
- Any information or code or number or token (not being Indian or foreign currency) which has been generated by cryptographic means. It digitally represents value exchanged with or without consideration, having inherent value and capable of being transferred, stored or exchanged electronically.
- The Non-Fungible Token (NFT) or any token of a similar nature will also be included in the VDA
- Any other digital asset, which the central government may specify by notification to the Official Gazette.
For the calculation of the taxable income of VDAs, only the cost of acquisition is to be deducted. No other expenses (such as transaction cost or interest cost of borrowing, etc.) are deductible. The basic exemption limit of Rs 2.5 lakh is not applicable on income derived from the transfer of cryptocurrencies. Also, if the ARV transfer results in a loss, that loss cannot be offset by any other income, nor can that loss be carried forward to subsequent tax years.
During a financial year, if the total payment made to the cryptocurrency seller by the crypto exchange or any other payer exceeds Rs 10,000, a TDS of 1% will be deducted from the payment. ARVs as gifts will also be taxed if the value of this gift exceeds Rs 50,000. This tax will be paid by the recipient.
In accordance with the law, gifts received from relatives, gifts received in marriage, gifts by will/inheritance will not be taxed. Taxable gifts include gifts received from friends, gifts received on birthdays, anniversaries, etc., or if the value of the gift exceeds Rs 50,000. Therefore, cryptos received as gifts under the taxable category will be taxed according to the new standards. These changes will apply from April 2022.
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Uncertainties remain
Cryptocurrency is a relatively new technology that is unfamiliar to many. These first steps related to the VDA and taxation are welcome. But there are still gray areas to be clarified, especially on the status of crypto-currencies in India.
For example, if someone pays for goods and services via crypto, will that be considered a sale or a method of payment? Will the buyer of goods and services pay tax, if considered a transfer, and will the seller of goods and services deduct TDS? How will forex transactions be handled? Also, will GST apply to cryptos and if so, which category will they fall into? Will tax be levied on the development of such a VDA?
Some experts say that by taxing income from virtual digital assets, the government has legalized the use and associated transactions of cryptocurrency. But according to the Supreme Court’s decision in Commissioner of Income Tax vs. SC Kothari (1967), it has been ruled that where the trade is illegal it will be treated as a trade within the meaning of the Income Tax Act and any profit derived from it will be subject to tax under the Act.
Applying this ruling in the context of the VDA, regardless of the nature of the trade, if it generates profit, sovereign authorities can impose taxation on it. Therefore, greater clarity can only be achieved through further legislation on this subject.
The budget did not go into detail on the announcement of a digital rupee. This is obviously left for the future.