Debate around the legality of cryptocurrencies

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Last Updated06/02/2022

In her Budget speech, Finance Minister Nirmala Sitharaman introduced a 30% tax on income earned from transfer of virtual digital assets.
The Government is yet to recognise cryptocurrencies, including Bitcoin and Ethereum, but this ambiguity has not stopped people from trading in digital assets in large numbers.
This apparently forced the Government in announcing a tax on such transactions.

The Budget has proposed a 30% tax on income from the “transfer of any virtual digital asset.”
Except for the cost of acquisition, no deduction will be allowed.
Losses from such transfers cannot be set off against any income.
Tax will be deducted at source at the rate of 1%, so as to capture transaction details, thus initiating a tax deducted at source (TDS) mechanism.

The Government and the Reserve Bank of India have in the past cautioned people against considering cryptocurrencies as legal tender.
The fact that transactions using such currencies can easily bypass the tax net, and therefore be used for illicit transactions, have been bothering governments across the world.
The Reserve Bank of India, in 2018, directed banks not to provide services to the cryptocurrency ecosystem.
The Supreme Court set the RBI directive aside, calling the move disproportionate, given that such currencies were not banned in the country.
A law on cryptocurrencies, which was supposed to have been brought in last year, is yet to see the light of day.
The broad expectation about the Government’s approach to this was set by a 2019 report by an inter-ministerial committee which recommended a ban on all cryptocurrencies.
Yet, through all this, cryptocurrency trading has grown in India.
There has been a phenomenal increase in transactions in virtual digital assets.
The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.

Statements by ministers and bureaucrats after the Budget seem to suggest that the legality of cryptocurrencies in the country is still a grey area despite the announcement for tax.
However, Ms. Sitharaman, in an interview, seemed to suggest that the question on the ban hasn’t been decided one way or another.
She also seemed to divorce the taxability issue from the legitimacy issue.
In recent days, experts have pointed out that the legal position is in sync with this thought process.
For instance, the verdict in the Commissioner of Income Tax, Gujarat v. SC Kothari is significant in which the court had observed that “if the business is illegal, neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute.