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  • Ridhi Gupta & B. D. Rao Kundan

Too Taxing to Regulate But Not to Tax?: Analysing the Fate of Cryptocurrencies in India


Recently, Dubai passed a Virtual Asset Regulation Law (“VAL”) to regulate the digital assets industry. With this legislation Dubai joins regions like the United States (“US”), Singapore, United Kingdom (“UK”) which have laws to govern cryptocurrencies. The VAL has set up an independent regulatory body i.e. the Virtual Asset Regulation Authority[1] (“VARA”) to regulate the cryptocurrency sector. VARA will have financial and administrative autonomy and perform functions[2] including issuing permits, protecting the beneficiaries’ personal data, making rules to curb illegal activities, proposing any required legislation etc. With the VAL in place, any person wishing to engage in virtual assets related activities, that are listed out in the aforementioned law[3], in Dubai would mandatorily require a permit[4] from VARA. VAL also provides penal[5] and grievance redressal[6] provisions. According to the data compiled by Chainalysis, UAE already holds the position of the third largest market of cryptocurrencies in the Middle-East and with the enactment of Dubai’s VAL, there is a strong likelihood of it becoming a more popular destination for companies and investors dealing with virtual currencies. Cryptocurrency exchanges like Buybit have already started shifting their headquarters to Dubai.

Earlier in 2021, Germany had enacted the Fund Location Act to allow fund holders to invest upto 20% of their assets in cryptocurrency. This law has the potential to make Germany an attractive fund location for investors as it is expected to bring US$ 415 billion through cryptocurrency investments in Germany. Unlike Dubai and Germany, India, due to the present legal void and dubious stance over the regulation of the Virtual Digital Assets (“VDAs”) industry, is witnessing the departure of some of the biggest cryptocurrency players out of India.

Recently, the Indian Government (“Government”) passed the Finance Bill, 2022 which has introduced a 30% tax on all exchanges in VDAs. This article analyses the present situation of cryptocurrencies in India and the recent tax levied by the Government on them, and proposes suggestions for the regulation and taxation of cryptocurrencies.

The Present Situation of Cryptocurrencies in India

As per the 2021 Global Crypto Adoption Index, India stands second in the world in terms of cryptocurrency adoption. The cryptocurrency market in the country has grown exponentially by 641%. Recently, even some broking platforms have seen a dramatic rise in the number of users and one of the platforms involved in cryptocurrency exchanges in India has registered a 3,500% rise in transaction volumes in 2021. Cryptocurrencies have become popular among the youth and a huge number of people from tier 2 and 3 cities are also investing in crypto- assets. It is estimated that more than 15-20 million Indian investors hold crypto-assets of worth 400 billion rupees ($ 5.37 billion).

While countries across the globe are becoming attractive spots for cryptocurrency exchanges, India with its recent tax levy on VDAs and still no law to regulate the cryptocurrency sector is not only creating confusion with respect to the legality of VDAs, in the minds of traders and investors, but also hindering investments and growth in the industry.

Investors, traders and virtual assets’ platforms have been eyeing the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (“Proposed Bill”) which has been in talks for a long time now but is yet to be released in the public domain. The said objective of the Proposed Bill shall be the facilitation of a framework for creation of digital currency by the Reserve Bank of India (“RBI”) and prohibition of private cryptocurrencies in India, barring certain exceptions. In 2021, the Ministry of Electronics (“MoE”) had released a draft strategy paper titled National Strategy on Blockchain which highlighted certain hurdles to mass adoption of cryptocurrencies including the ambiguous nature of tokens and provisions for data protection such as right to be forgotten and localisation norms. It is expected that the Proposed Bill will address these issues.

A committee formed by the Ministry of Finance recommended that all private virtual currencies should be banned as cryptocurrencies are decentralised and the risk of market fluctuation makes their regulation a daunting task. Further, the committee said that consumers were at high risk of fraud with no remedy available and that virtual currencies could be used for criminal funding.

While presenting the Budget for 2022, it was announced by the Government that RBI would issue the Central Bank Digital Currency (“CBDC”) i.e. the Digital Rupee or digital fiat currency of India in the years 2022-23. The trials for CBDC were to start in December 2021, however, they have not yet taken place. As per recent reports, RBI is planning to adopt a step-by-step approach to launch CBDC. Central Banks of different nations are pushing to adopt national digital currencies at the earliest. Nine countries have already launched their digital currencies while countries including Russia, Sweden, China, Jamaica, Canada, U.S., U.K are at different stages of launching their digital currencies. For instance, in Nigeria e-Naira, the digital currency of Nigeria, holds the same value as the fiat currency, Naira. At present this digital currency can be used only by the bank account holders in Nigeria. UK on the other hand is currently on the research and exploration stage for the development of its digital currency. India’s steps towards the trial and adoption of its digital currency are still awaited.

Vidhi Centre for Legal Policy (“Vidhi”) in its Working Paper titled, Blueprint of a Law for Regulating Assets has provided detailed suggestions as to how India can regulate cryptocurrencies. The Paper first lists the twofold concerns in completely banning cryptocurrencies which are, firstly, since these assets occur virtually without any geographical boundaries and anonymous identities of key players, the implementation of the ban is very difficult, and secondly, the ban may result into illegal trade in cryptocurrencies. The Paper then suggests a standalone law to regulate cryptocurrencies with significant provisions, such as definition for different crypto assets and a clear distinction between fiat crypto assets and other crypto assets, requirement of regulatory authorisation from bodies like SEBI and independent regulatory organisation of crypto asset service providers to prescribe standards on specific issues.

With no law in place for regulating the VDA industry, the recent tax levy can further result in complicating the understanding of VDAs and confusing the investors, traders and digital asset platform holders regarding the legality/ illegality of VDAs.

The 2022 Taxation Scheme

At present, the Government continues to not recognise VDAs as legal tender, except digital rupee, despite introducing the taxation of VDAs through the 2022 Budget. As per the taxation scheme, VDAs will be recognised as a separate class under the head ‘capital assets’ and gains out of VDAs would be taxed as capital gains. Therefore, any gains arising out of the transfers of VDAs, after April 01, 2023, will be taxed at the rate of 30% under Section 115BBH[7] and a withholding tax at the rate of 1% will be applicable on the payment of sale consideration exceeding Rs. 10,000 for VDAs[8]. A VDA has been defined under Section 47A[9] as “any information, code, numbers, or tokens, created with blockchain/cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically”, for the purpose of taxation.

A Non-Fungible Token (“NFT”) or any other token of similar nature or any other digital asset specified by the Government official gazette, will be considered as VDA. The taxation scheme does not differentiate between cryptocurrencies and other VDAs. For instance, it considers both NFTs and cryptocurrencies in the same category, despite the differences between them. While both cryptocurrencies and NFTs are built from blockchain technology, cryptocurrencies are fungible or interchangeable, which means while two same cryptocurrencies will have the same value, NFTs are non-fungible and thus not equal in value. Some NFTs are still developing and there is a possibility of further classification of NFTs and thus, different taxation schemes for both cryptocurrencies and NFTs are required to avoid any tax controversy.

Cryptocurrency mining, which is the process of adding new transactions to the blockchain and creating new cryptocurrency in circulation, is one of the major aspects of this industry. Cryptocurrencies created through mining are self-generated capital assets and further sale of such cryptocurrencies would give rise to capital gains. The cost of acquisition of a cryptocurrency generated through mining cannot be determined, as infrastructure costs incurred in such minings are not mentioned  under Section 55 of Income Tax Act, 1961, which defines the cost of acquisition of self-generated assets. Many countries that have laws to regulate cryptocurrencies have made crypto mining legal. However, in India it is neither banned nor regulated. This is another issue to be addressed by the regulators.

Though the Government has introduced tax on VDAs, it is yet to address various tax related concerns. At present a person needs to report his/her cryptocurrency transactions only in two circumstances, (i) income arising out of VDAs transactions for the purpose of taxation, and (ii) disclosure of profit or loss by the companies involving cryptocurrencies, as required by the Companies Act[10]. However, only companies involved in investment advisory or wealth management are obligated to such disclosure of their holdings and ownership of VDAs and not individual advisors and fund managers. Further, the taxation regime provides no provision for deduction or allowance of any expenditure except the cost of acquisition on income from VDAs. The set off and carry forward rule shall not be applicable in case of VDAs.

While some people may think that the imposition of tax on VDAs makes them legal, the jurisprudence on direct taxation suggests the contrary as under the Income Tax law even the income arising out of unlawful businesses is subject to taxation. In the case of CIT v. Thangamani[11], the Hon’ble Madras High Court observed that income tax authorities are only concerned about the income and not about the mode and means of acquiring it. Similarly, the Hon’ble Gujarat High Court had allowed[12] deductions from the income generated from a smuggler’s confiscated gold, as it accounted for loss in his business. The Court also took note that for the purpose of taxation, no profit or loss can be excluded if it is carried out in a commercial manner, irrespective of its legality. However, it is to be noted that the guiding principles in these decisions do not sanctify illegal activities. The recent judgement of Hon’ble Supreme Court in the case of Internet & Mobile Association of India v. RBI,[13] which set aside the RBI circular banning the virtual currencies, suggested that cryptocurrencies are not prohibited. Further, in the absence of any law penalising any activities related to VDAs, it is difficult to determine whether holding, transferring or managing VDAs are legal or not. Despite the conundrum, the move of taxation of VDAs has given some sense of relief to the investors as the Government has changed its stance of imposing blanket ban on cryptocurrencies and has opted to come up with taxation scheme for it. However, at the same time imposition of a flat 30% rate shows the Government’s inclination to deter the promotion of cryptocurrencies or any other VDAs.

Vidhi also released a Working Paper (“the Paper”) titled, Taxing of Cryptocurrencies highlighting, among other things, the negative implications of the 30% tax levied by the Central Government on virtual assets. Firstly, the Paper provides that a standard tax rate on all transactions involving crypto assets would be disruptive to the crypto industry due to the heavy tax cost it would result in. Secondly, it criticizes the provision of ‘withholding of tax’ at the rate of 1% on cryptocurrency transactions as this would drastically hinder the growth and innovation in this industry and suggest removing the withholding obligation altogether. Thirdly, it terms this levy of tax as violative of the ‘tax neutrality’ which is a key principle followed in taxation. This principle suggests that tax decisions should strive to be neutral so that the decisions of individuals depend on economic merits and not the amount of tax liability associated with a transaction. The heavy tax levied on cryptocurrencies is likely to discourage individuals from dealing in cryptocurrencies. The Paper further suggests that cryptocurrencies should be taxed as either capital assets or stock in trade as is done in many jurisdictions. While the consideration from the transfer of a capital asset is taxed at a ‘fixed rate’ depending on the type of the asset and period of holding, the consideration from transfer of stock-in trade is taxed at ordinary slab rates. The Central Board of Direct taxes (“CBDT”) had in a 2007 circular held that while classifying shares as capital assets or stock-in trade, factors such the nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions. Since both shares and cryptocurrencies are intangible assets, this approach may suit the latter as well.

The Way Forward

In this era of cutting-edge technology, countries, including third world nations, are adopting advanced technologies and becoming self-reliant with positive effects on their economies. In the recent past, the world has witnessed a dramatic rise in the popularity and use of virtual currencies by the people which has led many countries to enact laws to regulate them. However, the Government has, so far, maintained an adverse stance on the legalisation and regulation of virtual currencies in India. Moreover, after numerous failed attempts to put a blanket ban over virtual currencies in the country, the Government has decided to impose a heavy tax on transfer of VDAs (which includes cryptocurrencies) and to come up with its own virtual currency. Considering the popularity of virtual currencies in the country and their role in economic growth, the authors propose the following suggestions for the regulation of virtual assets in India:

  1. It is suggested that the Government enacts the Proposed Bill. The Proposed Bill should provide clear and inclusive definition for the term ‘virtual digital assets’, definitions for all key terms related to them, differentiate between fiat cryptocurrency and other cryptocurrency and address the issues raised by the draft strategy paper released by MoE. The Proposed Bill can be made on the lines of regulations enacted by Dubai and New York wherein to trade in cryptocurrencies, a license is mandatory. Further, as suggested by Vidhi, the Government may declare certain crypto assets as ‘prohibited’ based on grounds such as public interest and morality. The Proposed Bill may set up an independent regulatory authority to oversee the transactions involving crypto assets or authorise the existing regulatory authorities like RBI to regulate the industry.

  2. For the purposes of taxation both virtual currencies and NFTs are considered the same but in reality, they are not and hence, there is a need for different taxation schemes for virtual currencies and NFTs. The Government must rethink its 30% tax levy on VDAs in light of aforesaid issues and do away with the 1% withholding obligation in order to promote them and encourage more people to invest in them.

  3. Further, the Government should take into consideration untouched areas such as implications of the tax on crypto miners. Recently, it was clarified that no deductions would be allowed on infrastructure cost incurred in mining of virtual currencies. Since, the infrastructure cost in mining is too high, the Government should consider framing laws or rules to allow such deductions as is done in countries like Canada, where business expenses incurred in generating virtual currencies are deductible.

  4. The trials for CBDC should be started and India should prioritise adopting its digital currency. India can take inspiration from countries like Nigeria which have introduced digital currencies and observe how countries like UK, US are moving towards adoption of their digital currencies.

  5. Government must reconsider its adverse stand on legalising private virtual currencies and should frame laws for its regulation. Looking at its popularity and adoption by the masses, a regulatory authority must be established to deal with any and every issue related to virtual currencies, be it issuing license or suspending it in case of violation of rules regulating it. Since the digital universe does not have any boundaries, regulation of the activities related to virtual currencies would require global cooperation especially from companies involved in this industry to make it more transparent and safe for the people to invest and to reduce any threat of terror financing.

Given India’s position as the second largest cryptocurrency users hub in the world, it only seems imperative that the country soon comes with a law to regulate this industry.


[1] Virtual Asset Regulation Law, art. 4, The Supreme Legislation Committee, 2022 (Dubai).

[2] Id. art. 6.

[3] Id. art 16.

[4] Id.

[5] Id. art. 20.

[6] Id. art. 22.

[7] The Finance Bill, § 28, No. 18, Bills of the Parliament, 2022.

[8] Id. §194.

[9] The Income Tax Act, §47A, No. 43, Acts of Parliament, 1961.

[10] The Companies Act, §129, No.18, Acts of Parliament, 2013.

[11] CIT v. Thangamani, [2009] 177 Taxman 499.

[12] Fakir Mohmed Haji Hasan v. CIT [2002] 120 Taxman 11.

[13] Internet & Mobile Association of India v. RBI [2020] 115 53/158 SCL 448.

This article has been authored by Ridhi Gupta, Junior Editor and B.D. Rao Kundan, Online Content Editor at RSRR. This blog is a part of the RSRR Editor’s Column Series.


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