The State of Crypto Regulations in India

In terms of market capitalization, 2021 was the peak year for cryptocurrencies. Although Bitcoin has maintained its popularity, other cryptocurrencies such as Ethereum, Cardona, Dogecoin, and even more obscure derivatives like Shiba Inu have seen increased growth over the past year.

However, that expansion wasn't caused just by speculators' demand for and supply of cryptocurrencies. This past year saw a lot of talk about the future of cryptocurrency and how governments may regulate its use.

Last year, we saw Bitcoin become legal tender in El Salvador, several businesses began accepting cryptocurrency payments, prominent figures invested in NFTs and crypto tokens, and NFTs themselves penetrated the mainstream.

In spite of this, the crypto market started 2022 with the same degree of uncertainty that it had in 2021, notably in India. What the government will do with cryptocurrency is a mystery. It hinted throughout 2021 that cryptocurrencies might be recognized as digital assets, only to introduce a draft measure in November 2021 demanding a complete ban on private cryptocurrencies and then introducing a hefty tax slab on cryptocurrency investments.

However, the crypto ecosystem is seeing optimistic indicators from investors, developers, and other players in the industry, despite the murky nature of cryptocurrency regulations in the nation.

India has been a leading IT hub for decades, and the country has reacted well to the introduction of DLT-powered coins. The crypto revolution, which has besieged corporations and commoners alike, has been documented by many local cryptocurrency exchanges, all of whom are waiting for the formal proclamation of crypto regulations to determine the next steps. Before we dive into India's crypto rules, let's look at what's happened until now.

India's Crypto Journey So Far

In an April 2018 circular, the Reserve Bank of India (RBI) discouraged commercial and co-operative banks, small financing banks, payment banks, and NBFCs from engaging in cryptocurrency transactions and from providing services to any organizations engaged in such transactions.

This action was taken due to widespread confusion and ignorance around Blockchain and related technologies like virtual currency. Several PILs argued that the restriction was unjust, and several initiatives were launched to educate the public about cryptocurrency. Therefore, in a well-reasoned ruling issued on 4 March 2020, the Hon'ble Supreme Court of India overturned the RBI's order.

The Court's judgment was heavily influenced by Article 19(1)(g) of the Indian Constitution, which guarantees the right to engage in 'any profession or occupation, trade, or business,' and the theory of proportionality.

Fast forward to 2022, the Union Budget of 2022 suggested the legalization of cryptocurrencies as digital assets (VDA). However, although cryptocurrencies have been recognized as assets, they are taxed differently than traditional assets. A person's total taxable gain from the sale or exchange of cryptocurrencies, other virtual digital assets, and NFTs is now capped at 30% under the new crypto tax regulation.

In addition, the taxpayer may deduct nothing from the proceeds of the sale of the cryptocurrency asset other than the amount actually spent to acquire the asset. The regulators have also clarified that mining infrastructure expenditures would not be included in the cost of acquisition.

To summarize:

• A 30% tax will be applied on any profits derived from cryptocurrency transactions.
• Gifted cryptocurrency will be subject to taxation. The recipient will be responsible for this.There will be a 1% tax deducted at source (TDS) for all crypto-to-crypto transactions and Crypto-INR sell transactions.
• For more details, refer to our in-depth article on crypto taxation.

So far, this is what has unfolded in terms of the regulatory context. Now let's delve into how India defines cryptocurrencies at present.

Who Regulates Crypto in India?

All cryptocurrency-related actions must be supervised by the Reserve Bank of India (RBI), India's central bank, and the primary institution in charge of regulating the country's financial sector.

What is the RBI's definition of cryptocurrencies?

Cryptocurrency, in the eyes of India's central bank, is a virtual currency that is created digitally by a chain of codes encoded in a system that employs cryptography and encryption. Blockchain is the underlying technology. Cryptocurrencies are a new kind of decentralized digital currency and a distributed ledger system for secure online transactions that use private and public keys for authentication and encryption.

Regardless of the aforementioned definition, Indian crypto rules cannot follow in the footsteps of countries like Japan, El Salvador, and the United States. Unfortunately, our government does not allow for 'full account convertibility,' the practice of freely exchanging one country's money for another's without any restrictions.

Is crypto trading regulated in India?

Cryptocurrencies cannot be deemed illegal since they haven't been banned or restricted by Indian regulators, and moreover, they have been taxed, giving the asset class further credibility. However, it must be noted that they haven't been approved as legal tender nor as a means of payment.

T. V. Somanathan, India's Finance Secretary, has told Bloomberg that buying and selling cryptocurrency is not illegal.

Meanwhile, according to the news agency ANI, Somanathan stated, 'Bitcoin, ethereum or NFT will never become legal tender. Crypto assets are assets whose value will be determined by two people. You can buy gold, diamonds, crypto, but that will not have the value authorized by the government.'

On a similar note, Revenue Secretary Tarun Bajaj described it best in an interview, noting that cryptocurrency earnings have always been taxed, but the new law would 'bring certainty in taxation of cryptocurrencies.'' Nonetheless, this new regulation 'does not convey anything on its legality which would come out once the bill (on regulating such assets) is introduced in Parliament.'

Likewise, Central Board of Direct Taxes (CBDT) Chairman JB Mohapatra remarked, 'Just because it is taxed does not make it legal.'

According to Business Today, Mohapatra also said that the act of levying a tax should not be associated with granting legitimacy to cryptocurrencies. According to a top lawyer who requested anonymity since he worked with the government on crypto rules, the administration believes that everything is taxed, but not everything is legal. Even smuggled-in illegal goods are subject to taxes.

'If you smuggle and are caught, you are liable not only for the forfeiture of goods and benefits but also for a penalty.' 'They also charge tax on it,'' the attorney added.

The current state of the legality of cryptocurrencies is quite confusing, and regulatory clarity is much needed for the industry to thrive. As of now, you can trade cryptocurrencies without any worries on licensed cryptocurrency exchanges like Crypto Force, which abide by all the existing taxation regulations that have been imposed.

What are the regulations around NFTs?

The most likely way to understand the new rule is that NFTs will be taxed in a way that is similar to how digital assets are taxed.

The government has reportedly been looking for a way 'to define just what is or is not a non-fungible token,' and it has 'retained the power to say this is not an NFT' in the new regulations. In other words, the government has kept the power to exclude any NFT it wants through a notification.

What is the future of Crypto in India?

It's difficult to predict where cryptocurrencies will go from here. Cryptocurrencies are not accepted as legal tender in India. However, the government has decided to tax cryptocurrency at the rate of 30%. For the time being, this seems to signal that the Indian government is exploring the potential of cryptocurrencies.

The government's stance on cryptocurrencies has mellowed over time. In 2022, the Indian government is planning to pass crypto regulatory legislation into parliament that will seal the future of cryptocurrencies like Bitcoin in the country. Experts in the financial sector believe that the government is encouraging investors to exercise prudence until regulatory frameworks are established in the nation by placing cryptocurrencies in the highest tax bracket in the country.

It has also been declared by the government that a digital Rupee would be introduced, with the Reserve Bank of India (RBI) issuing and backing the currency. This demonstrates the government's openness to the evolving international monetary system and its desire to include digital currency implementations in India's monetary system.

Disclaimer: Cryptocurrencies are highly volatile and subject to market, technical, and regulatory risks. Crypto trading requires one’s own diligence, and Cryptoforce will not be responsible for any losses incurred. Any information provided here should not be regarded as Cryptoforce’s technical or financial advice.