Crypto Currency –Investability,Legality and Taxability

Crypto Currency –Investability,Legality and Taxability




Loading

Crypto Currency –Investability,Legality and Taxability

 

Author CA Vivek Shah

CA Vivek Shah

 

 

 

 

 


 

Ever since its inception, cryptocurrencies have always been a subject matter of discussion. Right from its early days when they were touted to be like just another Ponzi scheme, to now, where we see countries accepting it as a legal tender; the journey so far has been quite adventurous& interesting. The technology behind cryptos is known as ‘blockchain’. It is a decentralised technology which can be used for multiple purposes such as land records, medical records, banking, insuranceetc. Crypto transactions are just one small application of the technology which is much larger and can be used for multiple other applications.
The matter related to cryptocurrenciesin India was first discussed on the floor of the house of the parliament, when the then finance minister late Shri Arun Jaitley famously remarked “India does not accept cryptocurrencies as a form of legal tender, however, the benefits of blockchain technology shall be used for the development of our country.”. At this stage it was not mentioned whether cryptocurrencies were legal or illegal. back then there was no clarification whether cryptocurrencies were to be considered as a separate asset class or not. moving forward now the question was asked to the RBI about the legality of cryptocurrencies, however, it only mentioned that it does not consider any cryptocurrency as a legal tender and hence it was not under their jurisdiction. as the market matured, there are a greater number of people getting associated with crypto transactions. At this juncture the RBI decided to impose a ban on all banks from providing servicesto crypto exchanges. this led to even greater confusion among those who were trading in cryptos. Subsequently the matter about registration & regulation of crypto exchanges was raised to SEBI. Sebi concluded that cryptos are neither securities nor commodities nor currencies, and in that case they would not have jurisdiction over these crypto exchanges. this makes us ponder over another question that how did these exchanges get recognised as exchanges. if one takes a liberal view, it is prudent to say these so-called crypto exchanges areself-regulated,self-assumed and self-governed. There is absolutely no regulatory authority, agencyor department which governs the transactions taking place on these so-called crypto exchanges. On analysing the above given facts and the sequence of events, one wonders whether this was a collective failure of the system at large.
Investability
Investments in cryptos are not only subject to market risks, but also regulatory risk, geopolitical risks&social media risks. It is emphasised over here that social media plays a major role in fluctuating the price of certain cryptos.In the past it has been observed that the price of a particular crypto increases if an entrepreneur/ billionaire tweets that they will accept crypto for selling their electric vehicles. Similarly, after a couple of weeks when the same entrepreneur / billionaire tweets that they will no longer accept cryptos for selling their electric vehicles the prices of cryptos started crashing.Though the prices of cryptos are determined by the market forces, one cannot overlook the fact that inherently, cryptosare extremely volatile in nature.
Before one plans to invest in cryptos there are multiple factors which should be considered and analysed. It is important to understand that as of now there are more than 9500 cryptos which are recognised, there could be even more cryptos then this figure which are not yet recognised. this number is constantly increasing as you read this article.For all you know, the number could have crossed 10,000 by the time this article is published. before investing there are multiple factors which need to be analysed such as the price, the total circulating supply, the total mined quantity, the total volume of transactions, exchanges on which a particular crypto can be traded,it’s team, their vision& finally, is it a business or just a currency. Quite a few cryptos claimthat in order to avail their service they need to be paid in their own crypto. in such cases, these cryptos are not just a currency but also a business. if the number of people wanting to avail their services are large, then in that case it is observed that the price of that particular crypto may increase overtime. Some cryptos claim that a particular process can be simplified or expedited using their blockchain.
In order to invest in cryptos in India, the easiest way is to open an account with one of these so called self-assumed, self-regulated&self-governedcrypto exchanges. One needs to verify their kyc documents and load money through banking channels to start investing in cryptos. charges and Commission on some of these exchanges are not transparent and they can range from anywhere between 0.25%to 7% of the transaction value.
Cryptos have been classified as a separate asset class in India,they are now considered as virtual digital assets (VDA). Another evolving area in the crypto world is of non fungible tokensthey are also referred to as NFTs. NFTs are form of digital art which can be bought and sold just like a traditional piece of art. the creator of this digital art or NFT can decide its price, rarity and percentage of royalty on every subsequent sale. NFTs establish ownership of the digital art on blockchain. There are music NFTs, video NFTs & image NFTs as of now. Any person can create its own NFT and put it up for sale on an open platform. Recent trends have shown that celebrities, sports persons and entrepreneurs have started launching their own NFT collections on various platforms. Globally, the demand for NFTs is extremely huge and India shall also witness a demand in digital art from good content creators in the years to come. Some NFTs also come with real world benefits, such as seeking advice from an entrepreneur, or meeting your favourite celebrity for 15 minutes, or a video call with a sports person. Though the art is digital, but to create value for a prospective buyer, some real world benefits can also be added to the NFT.
We are living in interesting and dynamic times, where investment shall not only be limited to cryptos or NFTs. Corporations are selling virtual land in the Metaverse as a digital asset. What is even more interesting to know is that there is more demand than supply for such digital assets.
Whether one should invest in cryptos, NFTs or digital land, totally depends on the risk appetite of the individual. A lot of people follow the policy of investing only an amount which they can afford to lose. Traditionally, fiat currencies have been backed with some asset, in the case of cryptos, there is no asset backing and hence, there is no intrinsic value which one can derive. However, nothing contained herein shall be construed to be financial or investment advice. Each person must exercise caution before investing in any asset class including cryptos.
Legality
Whether cryptos are legal or illegal is determined by the law of the land. As of now, in India, there are no law which regulates it or legalises it. At the same time, there is no law which prohibits it either. So, in the absence of any specific law or regulation, the decision of a person lies on the interpretation of the facts and circumstances of the case.
To understand the legal position, one must look at precedents and the global scenario to determine whether holding, trading & mining of cryptos would be a legal or illegal activity. Let’s take an example of marijuana – a prohibited substance under the Narcotic Drugs & Psychotropic Substances Act in India. There is a law and that law declares it illegal to possess, consume or deal with such substances. However, the same substance, it legal for consumption in some states in USA, because the law allows people to consume that substance.  So the question of legality can only be answered if there is a law present. Realistically, cryptos enable people to move their wealth from one country to another, without reporting it to anyone and with no restrictions whatsoever. The icing on top is that there is complete anonymity, and the beneficial owner cannot be tracked. This has led to a lot of illicit wealth being parked in cryptos. Based on the present law, this would amount to a clear violation of Foreign Exchange Management Act & Prevention of Money Laundering Act in India.
However, globally some countries have recognised cryptos as a separate asset class. In some countries such as El Salvador, it is a legal tender, which is to say that one can pay taxes to the government in crypto. In times of economic crisis and sanctions, cryptos are gaining more adoptability and popularity. In China, it is illegal to deal with cryptos.
Due to regulatory hurdles and uncertainty in the crypto policy in India, a lot of companies have shifted to other countries where they can officially create, distribute, deal and trade in cryptos. Some popular countries which are crypto friendly are British Virgin Islands, St. Vincent& the Grenadines, Curacao & Panama. Many have also selected Singapore as their destination primarily because cryptos are regulated and there is clarity in the legislation which regulates it. Companies prefer floating 2 entities at the time of creating their own crypto – first a trust or a foundation which holds the cryptos and the second one is a marketing or distributing arm which conducts all activities and enters in contracts with others. This structure is preferred so that the founders can safeguard the crypto in case of any eventuality or an adverse regulatory condition.
About legality of cryptos, a major concern which looms is whether issuing any currency is a ‘sovereign right’ or whether any person or corporation can also enjoy this right. Countries have had the right to issue their own currency, regulate and monitor it. Also, currencies are issued by Central Banks and not by the governments in power at the time of its issuance. So essentially, there is separation of control and power in fiat currencies. This maintains the value of a currency to a large extent. In cryptos, none of this is possible due to the inherent nature of blockchain technology. At the same time, some also argue that cryptos are necessary to break the monopoly of certain governments which keep printing additional currency without any fundamental justification.
Taxability
The Finance Budget of India has proposed to tax income from crypto transactions at a flat rate of 30%, without claiming any deduction and no set-off of any losses against any income. In addition to it, there is also 1% TDS on every transaction which shall become applicable.This implies that any cost incurred such as brokerage, commission & trading costs cannot be deducted from the gains. In any other business, various deductions such as rent, office expenses, staff salary etc are allowed as a business deduction, however, in crypto trading no such deductions shall be allowed.
The Finance Ministry has recently clarified in the Rajya Sabha (the Upper House), that gains from one crypto cannot be set off against losses of another crypto. It seems the government has taken a strict view considering that there have been some instances in the past where manipulation of stock prices could be done in some listed companies to book losses against actual profits and that would reduce the overall tax liability of the assessee. It seems that government has taken a correct and a fair stand on this matter, since cryptos are not regulated and there could be some deliberate attempts by some sections of the society to specifically manipulate the price of cryptos to book losses and make adjustments so that there would not be any tax liability. There is highly possible in cryptos since they are not regulated. At this stage, there is no clarity on the matter whether profits arising from crypto trade can be set off against losses arising from the same crypto in another trade. In my personal opinion, it seems that the government has taken an approach to “nationalise profits and privatise losses” arising from cryptos.
Some people argue that taxing cryptos makes it a legal activity to deal in. It is pertinent to note that the present Hon’ble Finance Minister Smt. Nirmala Sitharaman has clarified that taxing a transaction is the right of the government, but the issue of legality will be decided only after consulting all stakeholders and the process would take time to reach its finality.
In recent times, the matter of indirect taxes on crypto transactions has also erupted. Transactions which take place on crypto exchanges are subject to GST. Major crypto exchanges have paid tax on the commission or brokerage charged on transactions. However, as of now, there is no GST on trading of the full value of the cryptos, but only on the brokerage element in the transaction.
GST is also applicable on sale of NFTs by celebrities, sportspersons and artists which transact in India in Indian currency. However, it is observed that many NFT platforms are registered in jurisdictions outside India. In such a case, the NFTs are listed for sale or auction on the platform of the service provider which is situated outside India. The point of sale for such transactions is outside India. The sale consideration is also paid in crypto and not in fiat currency to a wallet which is situated outside India. Due to the nature of transactions, many exchanges and / or NFT creators deem this transaction to be ‘export of services’ and hence there is no taxability in India with respect to GST. For such transactions, one may argue that the ultimate buyer could be situated in India, however, there is no way as of now, to identify the location of the buyer from its wallet address.
About the Author: CA Vivek Shah is a crypto expert who has advised on numerous transactions across the globe. He has been delivering lectures on cryptocurrencies since 2017. He can be reached at info@shahvivek.com




Menu