In the Union Budget of 2022, the government of India announced that it would be launching a digital rupee and would start taxing income from virtual digital assets. A 30 per cent tax on any income from the transfer of virtual digital assets to be precise. The term “virtual-digital” asset might seem redundant in usage as something that is “virtual” (at least with the technology available now) by definition has to be functionally digital. Defining terminologies in the crypto space has always been one of the most challenging tasks for the govt. In late 2021 there were many ambiguities with the definitions of cryptocurrencies or crypto assets, which started an Indian Crypto Ban hoax, causing unnecessary chaos, which probably led to the definition of the term “Virtual Digital Assets”.
In the explanatory memorandum of the Finance Bill, the government stated, “To define the term “virtual digital asset”, a new clause (47A) is proposed to be inserted to section 2 of the Act. As per the proposed new clause, a virtual digital asset is proposed to mean any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value which is 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 and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically. Non-fungible Token and any other token of similar nature are included in the definition.”
Now that the definition of virtual digital assets has unequivocally been clarified (sarcasm), what does the “monstrous” tax on crypto assets mean to an average citizen? Purely from a policy-making perspective, I find large taxes on certain commodities to be counterproductive if it does not cause an intrinsic rejection among the citizens to be associated with that particular commodity. We have seen this to be the case with alcohol, tobacco etc. And to say that India has accepted blockchain as the future of good governance and to impose a huge tax on crypto assets might seem hypocritical at first glance. But is that the case?
As someone passionate about de-fi (decentralized finance), blockchain technology and Web3, I have never quite understood the reason behind cryptocurrencies being so volatile, as the gas fee (transaction fee) on transacting from popular chains like Bitcoin and Ethereum to be extremely high (for a reason!) especially for someone to make a living out of day-trading crypto assets. And I find no other compelling reason but the fact that people/traders measure or predict the value of Cryptocurrencies purely using the tools and techniques that have been applied to the equity and forex markets. Now it is a simple question of whether people investing in cryptocurrencies are in it because they believe in the technology or have a cliche algorithm running on their computers/mobile phones that predicts that their investment would reap extraordinary benefits in the immediate future? The latter has led to many youngsters blindly investing in cryptocurrencies without understanding the consequences. Moreover, extensive advertising, rising NFT hype and our favourite Elon “The DogeFather” Musk phenomenon has played a persuasive role in making crypto investments. Further justifying the government’s concerns regarding crypto trading.
My friend’s silly solution to this taxation was to mine bitcoin and buy groceries from the dark web. As absurd as it may sound, he captured the essence of the technology (or at least some of it ) more than many who make a living out of it. And this shows the bigger picture of the “Crypto Conundrum” in India. People who invest in crypto because they believe in the technology(“the damned hodlers”) and people who invest in crypto because they want to diversify their portfolio would be far less affected by this taxation than your average “Dogecoin to the Moon” Joes and “Rainbow Ape NFT Collector” Billys.
Finally, I would like to draw attention to the word “transfer” that I highlighted in the first paragraph. To put it naively, you would only have to pay the taxes when you get a capital gain out of it, or simply put the money you make on a profitable trade. When you have invested in the technology that facilitates the most secure transactions, why not transact using the same! Making day trading profits on crypto is a classic example of failed “Indian Jugaad”.
Thus I hope this law incentivises people to learn about crypto, read the whitepaper before investing in it and use it the way it was intended to be used.
