Cryptocurrencies, which are classified as Virtual Digital Assets under Section 2(47A) of the Income Tax Act, are yet to be given recognition as legal tender by the central government in India. That’s the reason the Income Tax Department (ITD) is yet to issue any specific guidelines for taxes on crypto coins.
However, the taxation of Virtual Digital Assets (VDAs) is governed by key provisions in the Income Tax Act — Section 115BBH and Section 194S. These provisions mandate a flat 30% tax on gains from selling VDAs and 1% Tax Deducted at Source (TDS) on transactions.
The taxation of cryptocurrency in India has become a critical consideration for investors as the government adopts stringent measures to regulate the sector. With the imposition of a flat 30% tax on crypto gains, it is evident that authorities are taking a tough stance on what is viewed as a highly speculative and volatile investment avenue.
IND vs UAE U-19 Asia Cup 2024 Live Streaming: When and where to watch India vs United Arab Emirates match live?
Vikrant Massey’s lavish lifestyle: A sea-facing luxurious house in Mumbai, Rs 1.16 crore Mercedes-Benz GLS, and more
Also read: 4 Crypto Altcoins that could deliver 50 times returns by 2025
Utkarsh Sinha, managing director of Bexley Advisors, sheds light on the rationale behind this tax policy and the nature of cryptocurrencies as an asset class. According to Sinha, “Crypto gains attract a punitively high, flat 30% tax on capital gains. This is designed to discourage speculation on crypto, which is seen as an inherently unsafe and highly volatile product with no avenues for consumer protection that the government can offer.”
Explaining the inherent nature of investment-grade assets, Sinha elaborates:
“Inherently, any assets deemed investment grade are backed by or represent an entity that produces cash in the real world. Debt products produce income that is used to service the debt (that is, to pay the interest and to ultimately return the capital). Similarly, equity products represent future income streams that one discounts and prices at current values. Commodities too are backed by a physical product that can be bought or sold. Every other product – be it mutual funds, SIPs, etc. are backed by a combination of these three fundamental, return-generating assets.”
In contrast, cryptocurrencies lack this underlying support. “Crypto, unlike debt or equity, is fundamentally only a speculative asset. In many ways, crypto purchases are closest to art or other speculative assets, where the underlying product does not have any fundamental value; the value is a function of what the buyer is willing to pay for it. It is therefore highly prone to boom and bust cycles. Like baseball cards or Pokémon cards, there can be mania-driven booms and fear or financial crises driven busts,” Sinha notes.
Also read: Bitcoin from USD 1 to near USD 1 lakh in 14 years: Your Rs 100 investment is now Rs 1.65 crore!
The Regulatory Vacuum for Crypto SIPs in India
Another concern raised by Sinha pertains to the lack of regulatory oversight for Systematic Investment Plans (SIPs) in crypto. He warns that “SIPs in crypto are ordinarily unregulated in India. The reason is that both RBI and SEBI have taken a strong and clear anti-crypto stance and are not keen to encourage retail participation in what is inherently a high-risk product category with little retail protection.”
Most entities offering crypto-related products operate without regulatory approval, making them particularly risky for retail investors. Sinha cautions, “While the product might sound or appear similar to traditional SIP offerings, if one peels the layers, it is easy to see that both the entities offering them and the consumer protection mechanisms they offer are weak and unregulated. It should therefore be treated with utmost caution and one should only put only a speculative set of one’s capital in such products, that one is happy to lose.”
Conclusion
The 30% tax on cryptocurrency gains in India is not just a financial imposition but a policy tool aimed at curbing speculative investment in an inherently volatile market. With the regulatory framework still in flux and the risks associated with crypto investments remaining high, potential investors must tread carefully, fully aware of the tax implications and the speculative nature of the asset.
