A cryptocurrency is a digital money that is produced via the use of encryption techniques. Because of the use of encryption technology, cryptocurrencies may act as both a money and a virtual accounting system. To utilise cryptocurrencies, you’ll need a cryptocurrency wallet, often known as a cryptocurrency Demat Account.

Currently, there is no regulation of cryptocurrencies or non-fungible tokens (“NFTs”) in India. The Reserve Bank of India (“RBI”) attempted to ban cryptocurrencies in 2018, but the Supreme Court struck down the proposal, placing cryptocurrencies in a legal limbo that is neither formally unlawful nor legally acceptable. NFTs suffer from the same ambiguous legal status as cryptocurrencies but do not seem to have drawn the same level of regulatory ire.

Although there have been rumours of a comprehensive cryptocurrency bill, none of these have been made public, and it is still unknown how the Indian government would handle cryptocurrencies. There doesn’t seem to be any current effort to substantively regulate NFTs. The government is still deliberating how it will approach cryptocurrencies and NFTs.

A new tax framework has been put in place to tax gains and/or income from virtual digital assets (“VDAs”), which include cryptocurrencies, NFTs, and similar tokens, as well as other assets that the government may designate, while it continues to consider its position on cryptocurrencies and NFTs. As a result, under the Income Tax Act of 1961, there is now a tax of 30% plus surcharge and cess on the transfer of any VDA, such as Bitcoin or Ethereum (Income Tax Act). Though, the legal position of cryptocurrencies is still unclear.

Current Scenario: In India, cryptocurrency gains are subject to a 30 percent tax. Cryptocurrencies, non-fungible tokens (NFTs), and similar entities are grouped under virtual digital assets (VDAs) in the nation and face a rigorous taxation structure as part of the new system that went into effect on April 1 this year. While this may appear to be a harsh move at first — as all taxes do — it actually serves as a precautionary measure that can help users be wary of their crypto investments and not put all of their money in a highly volatile sector without a solid understanding, primarily due to promises of mega returns in a short period of time. The taxation of cryptocurrency is also seen as a means to legitimise crypto assets in India without outright prohibiting them, allowing investors and dealers to continue dealing with crypto without fear.

How does tax liability come about?

According to the Income Tax Act:

The entire fair market value of the asset is treated as taxable income in the hands of the person who obtained the VDA when they receive a VDA without payment and that VDA’s fair market value exceeds INR 50,000. The income tax bracket the person typically falls under determines the applicable rate of tax;

The difference between the fair market value and the consideration paid is treated as taxable income in the hands of the person who received the VDA when a person receives a VDA for less money than the fair market value and the fair market value exceeds the money by more than INR 50,000.

If a person receives income from the transfer of a VDA, that person’s income less the cost of acquisition, if any, is subject to tax at a rate of 30%. The applicable rate of tax will depend on the income tax bracket in which that person typically falls. In addition, the non-resident owner of the block chain where NFTs are traded will be subject to a 2% equalisation fee.

Finding a taxpayer’s taxable income or gains from the receipt or transfer of a VDA may be challenging for the following reasons:

Finding the person’s taxable income in relation to the asset might be challenging when a VDA is received for nothing or for less than the asset’s fair market value. In general, the value of cryptocurrencies and NFTs fluctuates greatly on a regular basis. As a result, determining the asset’s fair market value may be challenging.

It is generally accepted that the fair market value of a cryptocurrency purchased on a crypto-exchange or an NFT purchased on a marketplace is the price in effect at the time of the purchase.

The Income Tax Act makes issues even more complicated by mandating that, in cases where a resident transfers a VDA for consideration, the party paying that consideration must withhold 1% of it as income tax at the point of sale. Whether the consideration is entirely in cash, partially in cash and partially in consideration for another VDA, or entirely in consideration for another VDA, the requirement to deduct 1% of the consideration still applies.

Crypto tax: a comparative overview

In comparison to other countries, India’s tax system may appear a little more lenient, yet India’s crypto tax may appear punitive. However, the news of a crypto tax in India was broadly welcomed by the country’s crypto traders and investors, who saw it as the Centre’s attempt to legitimise digital assets. 

The complexities of cryptocurrencies and NFTs do not appear to be taken into consideration by the new taxation system the government has created. Experts in India and other countries had questioned whether cryptocurrencies and NFTs should be categorised as capital assets, currencies, securities, etc. prior to the revision of the Income Tax Act. To create a transparent and efficient tax system, it is imperative to analyse each category of VDAs.

The Income Tax Act now treats cryptocurrencies, NFTs, and other VDAs uniformly. While using DLT and blockchain technology, cryptocurrencies and NFTs have no other things in common. By their inherent nature, cryptocurrencies are fungible, whereas NFTs are not. The use of cryptocurrencies is somewhat limited. On the other hand, NFTs can be used in a number of ways – as art, instruments, certificates of ownership, etc.

Add to that the fact that the government is planning to launch a central bank digital currency (CBDC) shortly, indicating that India is pro-crypto (for the time being). CBDC, for those who are unfamiliar, is the virtual version of a fiat currency, such as the rupee in India. The RBI will issue the legal tender in digital form. Because it will be regarded as a digital token of the country’s official currency, it will be governed by the central bank. The CBDC is anticipated to assist India’s banking sector or to supplement current frameworks.

However, there are substantial allegations that cryptocurrencies are subject to a high taxation system in India. And this is correct. In fact, the cryptocurrency tax rate in India is greater than that of any other asset type.