- Date : 14/12/2021
- Read: 7 mins
There is a lot of confusion on what the Government intends to do with the Cryptocurrencies Bill. The public would like the Government to regulate and tax crypto. This article discusses the possibilities of crypto categorisation, framework, taxation, etc.
During the recent (October-November 2021) ICC T20 World Cup, there was a flood of crypto advertisements on all media platforms. With celebrities as brand ambassadors, cryptocurrencies seem to have caught the attention of the public. According to a CREBACO report, crypto investments in India have shot up from $900 million in April 2020 to $10 billion in November 2021. Some reports claim that India has the highest number of crypto investors globally, even ahead of the US.
The Government also seems to have decided to take a stand on crypto by listing the Cryptocurrency Bill for discussion in the Winter session of Parliament. This article aims to demystify the Bill based on the limited information available.
What the Government has said on the Bill?
At this stage, the Government has revealed very little information about the content of the Bill. It has listed various Bills for discussion in the Winter session of Parliament. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is one of them. Here’s what the Government has said about the Bill:
Based on the above information available, the Government has made three things clear:
- Creation of official digital currency
- Prohibition of all private cryptocurrencies, and
- Exceptions to promote the underlying technology
Let us discuss each of these points.
1. Creation of official digital currency
Through the Cryptocurrency Bill, the Government will create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India (RBI). In the past, the RBI Governor had spoken about the RBI's intent to create a Central Bank Digital Currency (CBDC). The RBI and the Central Government can use the CBDC to spread their financial inclusion program to bring more people into the financial system.
The CBDC will have the backing of the RBI, and it will be legal tender. It means people will be able to use it for financial transactions for goods and services. This is in contrast to China, which has banned all cryptocurrencies and has instead floated its own digital currency backed by the Chinese Central Bank.
2. Prohibition of all private cryptocurrencies
The Bill also seeks to prohibit all private cryptocurrencies in India. There can be different interpretations of this.
- Prohibition to use as legal tender: Most experts agree on one thing: the Government may prohibit all private cryptocurrencies (not issued by RBI) in India from being used as legal tender. It means cryptocurrencies cannot be used as currency like the Indian rupee (INR) for financial transactions for goods and services. In this case, cryptocurrencies cannot compete with or replace the Indian rupee or the digital currency issued by the RBI.
- Exceptions: The other interpretation is that the Government may classify all cryptocurrencies as private (other than RBI’s CBDC) and make an exception for some (such as Bitcoin) and pre-approve them for specific use cases. But, it may be a given that they will not be allowed to be used as legal tender.
- Private and public crypto: Some experts categorise existing cryptocurrencies into private and public. A public crypto transaction has a trail wherein the wallet address can be configured and the amount can be deciphered. A private crypto transaction masks the user's identity and activity. Based on this distinction, Bitcoin, Ethereum, Litecoin, etc., are classified as public cryptocurrencies, and Monero, Dash, Zcash, etc., are classified as private cryptocurrencies. Some experts believe the Government may prohibit the latter.
There can also be other interpretations of what the Government means by private cryptocurrencies. There are various interpretations, but it makes sense to wait for the Government to clarify what it means by private cryptocurrencies.
3. Exceptions to promote the underlying technology
The Government has said that it will allow certain exceptions to promote cryptocurrency's underlying technology and its uses. Every cryptocurrency exists as it has some existing use cases, and its developers may be working on new use cases that may come in the future. For example, Ethereum, the second-largest cryptocurrency after Bitcoin, has one of the highest use cases. So, the Government may prohibit all cryptocurrencies not issued by RBI from being used as legal tender. But it may allow the underlying technology of certain cryptocurrencies such as Ethereum, based on use cases.
Taxation of cryptocurrencies
All crypto investors are hoping that the Government will regulate cryptos rather than ban them through the Cryptocurrency Bill. Regulating crypto will help entrepreneurs build use cases of cryptos that will boost the start-up ecosystem. It will also help the Government earn tax revenues.
If the Government decides to regulate crypto and tax them, it will first have to categorise them. Countries have chosen to categorise cryptocurrency variously as a security, commodity, property, capital asset, foreign asset, etc. Most experts believe that the Government will categorise crypto as a capital asset.
Once the Government categorises cryptocurrency, there will be clarity on its taxation. Currently, Indian tax laws don’t recognise cryptocurrencies. So, investors are confused about how to calculate tax on it. Some of the methods they currently use include:
- Treating crypto gains as business income and paying tax accordingly
- Treating crypto gains as capital gains and paying tax accordingly
- Some people show crypto gains under ‘Income from other sources’ as they believe crypto qualifies neither as business income nor capital gains
- Some people don’t declare crypto gains in their income at all. They believe since the Indian Government does not recognise crypto, declaring crypto gains in their Income Tax Returns will land them in trouble.
Once the Government decides to categorise cryptocurrencies, investors can tell whether it is to be shown as business income, capital gains, income from other sources, or something else. There will be clarity on the tax rate and tax calculation method. Investors will also gain a good idea of the reporting requirements for holding cryptocurrencies.
Other reasons why the Government needs to bring a cryptocurrency law
Apart from the legal framework and taxation aspects, there are a couple of other reasons why the Government needs to bring in the Cryptocurrency Bill:
1. Protecting investors’ interests
At the start of the article, we saw how advertisements from various crypto platforms flooded television and other media forums during a recent sporting event. Some ads were promoting cryptocurrencies as safe investment products. Others compared crypto returns with fixed-income products such as fixed deposits and showed how crypto was giving better returns. Ads like these tempt innocent investors to open cryptocurrency accounts and invest in them without understanding the risks involved. Cryptocurrencies are highly risky and subject to sharp falls from time to time. The naive can lose their hard-earned money during such falls.
With a cryptocurrency law, the Government can frame certain guidelines for crypto advertisements. It can also appoint a cryptocurrency regulator, who can create awareness among the public about the risks involved in investing in crypto. The regulator can put a grievance redressal mechanism in place.
2. Preventing the use of crypto for anti-national activities
As per some reports, crores of Indians have already invested in crypto. With so many people already in it, there is a risk of crypto getting used for anti-national activities such as terror financing. With a cryptocurrency law in place, the Government can put a framework on who can invest in crypto and how much and keep an information trail so that it is not misused for anti-national activities.
The Government is mindful of crores of investors who have already invested a few lakh crore rupees in cryptocurrency. Banning them at this stage will put these investments at risk. The general public and most experts expect the Government to regulate crypto and tax them rather than ban them. The Cryptocurrency Bill will be tabled in Parliament for discussion very soon and will clear investors’ doubts. So, investors should not panic. Rather, they should stay calm and hope for the best.