Banned to Boon : India's brand new crypto taxation framework and its implications

India has just announced its framework to tax gains from cryptocurrency. Let's take a look at what this means for stakeholders all over the nation.

Banned to Boon : India's brand new crypto taxation framework and its implications

In a momentous move that will put India in the forefront of tech-forward economies, Honorable Finance Minister Mrs.Nirmala Sitharaman has announced the Indian government’s framework for the taxation of a newly defined asset class, called ‘Virtual Digital Assets’ - which includes Crypto, NFTs and other digital assets which can be earned by various means such as mining and yielding. This move has been welcomed readily by the Indian crypto community, which has been ripe with speculations about the proposed crypto bill over the past few months. Dissuading fears of a complete crypto ban, this taxation law has provided Indian investors with some much needed clarity about the government’s stance on digital assets. This taxation framework will allow India to monetize on the increasing global business opportunities surrounding digital assets.

Previously, according to income tax laws, income from investing in digital assets was classified either as “capital gains”, referring to long term earnings generated by holding various digital assets in your investment portfolio for a period of time that extended more than three years, without engaging in frequent trading activities, or as “business income”, which referred to income generated from frequent trading of digital assets in their respective financial markets. Capital gains were taxed at 20%, and business income was taxed according to the income bracket it was classified into.

To summarize, the Union Budget 2022-23 outlined the following points :

1) A 30% tax is to be levied on income generated from all classes of Virtual Digital Assets.

2) No deductions will be allowed on this taxable amount. Any losses generated from the trade of virtual digital assets can solely be adjusted against profits earned from their trade. This loss cannot be adjusted against income earned by an individual from any other source.

3) Additionally, when a transaction’s value crosses a certain (presently undefined) threshold, TDS (Tax Deducted at Source) of 1% will be deducted when the payment is processed.

4) Digital assets transferred as gifts will also fall under the purview of taxation, and the receiver will be liable to pay the tax.

The complete extent of the implications of the new taxation policy are yet to be analyzed. Once the comprehensive  guidelines are released, it will be much easier to determine the extent to which any individual investor would be liable to pay tax to the authorities, and how it would affect their overall earnings. We advise every individual to carefully read the legal definition of Virtual Digital Assets, and all the policies formed by the government relating to them, in order to avoid incurring any accidental or unplanned liability in the future. You can also keep track of any new information regarding governmental policies regarding digital assets and crypto, here on Unblocked.

Many are considering this taxation framework as the first step towards an RBI issued CBDC. One of the major hurdles in the development of CBDCs in India was the ambiguous defined asset class that cryptocurrencies and other virtual assets seemed to embody. Since the government has moved past the hurdle of defining and taxing digital assets, the way forward seems to be clearly in the direction of a centrally regulated digital version of the Rupee. If the RBI’s CBDC is released, India will become the first nation in the world to bring CBDCs from theory to reality. An Indian CBDC can provide huge economic growth to the country's economy, and lead to mass adoption of digital currencies by businesses and the large Indian population alike.

However, this does not necessarily mean that crypto would enjoy the same popularity in India. The heavy taxation imposed on Virtual Digital Assets is not going to be charged on the RBI’s imminent CBDC. It might be said that such an exception’s main motive is to dissuade the Indian population from using unregulated, decentralized crypto coins. There are many crucial points of difference between crypto currencies and CBDCs. The central one is, ironically, the problem of decentralization. CBDCs are controlled by a regulatory authority, by design. This causes them to face the same archaic bureaucratic setbacks that plague fiat currency. Sadly, the list of differences does not end here. To read more about the future of crypto as legal tender, read this article.

Nevertheless, by defining the taxation policies relating to Virtual Digital Assets, the Indian government has legitimized the crypto market. Therefore, many skeptics might now consider crypto as a viable investment option, and the market will hopefully see an influx of demand for various bullish coins. This will increase the confidence and interest of Indians in the booming crypto market, and lift the veil of notoriety that has enshrouded the world of crypto from the layman. Although opinions regarding the pros vs cons of CBDCs may vary greatly, the government’s increasing attention toward digital assets will surely accelerate the development of the technology they are based on. Over the years, we might even expect sophisticated laws that can adequately address the nuances of decentralization without curtailing individual freedom. After all, there is no such thing as negative publicity.

Disclaimer : This article is intended for informational purposes only. While we try our best to verify the contents of  our articles, DeFy cannot guarantee that this article, or any information we sourced from third parties which has been included in this article, are free of error. This article should not be substituted for investment/ financial advice. Any actions taken based on information contained in this article are at your own risk. DeFy does not claim to endorse views presented in this article as our own.