After mulling a ban, India breaks cryptocurrency taboo

By Hugo Barcia

New Delhi, Feb 18 (EFE).- The 30 percent tax on income from virtual digital assets recently announced by the Indian government finally broke a taboo on cryptocurrencies in the country, which had previously considered banning them, and is a first step toward their regulation, although it has also received criticism from users for the high tax burden.

“I believe the tax law in itself could be a little more friendly towards the industry. But the fact that a tax law has come out seems to be a positive first step,” Anoush Bhasin, founder of New Delhi-based cryptocurrency tax advisory Quagmire Consulting, told EFE.

This tax, which will be charged on any income regardless of the amount, will take effect from Apr. 1.

It will also place digital currencies at par with other activities such as gambling, a reflection of the government’s opinion of them since the use of cryptocurrencies as a direct method of payment is still very limited in the country and they are traditionally used as a source of income based on speculation.

To discourage this usage, the Indian government approved another tax of 1 percent on transactions of virtual digital assets and stated that any loss incurred from such a transaction could not be set-off against any other income.

This move has sparked strong criticism from the sector, which sees its margin of error reduced.

“It effectively makes it very difficult for traders and investors to buy and sell frequently. If I were to deduct 1 percent on each trade, every time I bought or sold, after a few 100 trades, my entire trading capital would have fallen significantly,” Bhasin said, adding that all these measures make it clear that “the government is saying that this is an activity that they discourage.”

The cryptocurrency sector is on the rise worldwide, attracting a record investment of more than $30 billion from venture capital funds in 2021, according to market data provider PitchBook, and India is no stranger to this growth.

India’s largest crypto trading platform WazirX said in its 2021 annual report that it registered $44 billion in volume in the year and its user base grew to 10 million.

This growth was recorded mainly after a ruling in March 2020 by the country’s top court quashing an order by the country’s central bank, the Reserve Bank of India, banning banks from supporting crypto transactions.

This opening led to a large number of people flocking to this market, a trend to which the first wave of Covid-19 also contributed with an increase in unemployment that forced people to look at different options to earn, according to Bhasin.

A year earlier, the government had also prepared a draft law to ban digital currencies, which provided for imprisonment of up to ten years for possession, use or mining of cryptocurrencies.

Despite this first step towards regulation, both the RBI and the government remain opposed to private digital currencies, describing them recently as a “threat” to the country’s financial stability.

Instead, the government has proposed to introduce a digital rupee, which is expected to debut this year and will act as a virtual currency issued by the RBI.

All these measures, welcomed by many users as a sign of the recognition of cryptocurrencies, do not, however, imply such a meaning in the legal sphere, founder of blockchain legal services firm Blockchain Lawyer, Varun Sethi, told EFE.

The taxation of cryptocurrency “doesn’t mean immediate recognition as a separate asset class since the Reserve Bank of India hasn’t yet clarified it’s stance. So at best this is still a work in progress law but a huge step in the right direction,” he said.

Sethi said he recommends waiting for the long-awaited Cryptocurrency Bill that the government announced last year and whose content remains unknown.

“There are more measures needed,” he said. “The primary amongst them is a regulatory framework which is expected from either RBI or SEBI (Securities and Exchange Board of India) in India along with elaborate provisions about categorization of different types of income from mining, trading and long term holding (of cryptocurrencies).”

“Currently all these are categorized under one head, which may not be the long term stance of the government,” he added.

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