The passage of the Finance Bill containing provisions to tax cryptocurrency leaves no doubt regarding the Centre’s stance on these assets. It is clearly worried about the surge in speculative activity on crypto-trading platforms which is luring gullible investors unaware of the risks associated with these instruments. Cryptocurrencies have no underlying value and are extremely volatile, increasing the risk of capital loss. Further, the crypto-trading platforms are unregulated, putting investor money at great risk. As the Finance Minister Nirmala Sitharaman elucidated in her reply to the parliamentary debate, consultations regarding regulating or banning the cryptocurrencies are in progress; meanwhile the Centre has decided to impose heavy and punitive taxes on crypto trading in order to deter investors and to reduce trading activity in this segment. This may have disappointed private cryptocurrency trading platforms and other stakeholders who had been vociferous in their demands to roll back these proposals. But they need to accept the fact that these platforms are functioning in a regulatory vacuum, transactions here are mostly not reported to any authority, nor is tax being paid on these transactions. This state of affairs is far from ideal and will obviously not be allowed to continue for long.

The Budget proposal to tax income from transfer of all virtual digital assets, which include private cryptocurrencies such as Bitcoin, at the rate of 30 per cent, which is much higher than the rate of capital gains tax charged on capital assets, was a signal to investors that VDAs are far more speculative and risky than conventional assets. The provisions that only cost of acquisition shall be allowed to be deducted while calculating income from VDAs, that loss from sale of private cryptocurrencies cannot be set-off against any other income and that gifts of these assets will be taxed in the hands of the recipient were also meant to warn investors and discourage them from buying them. The TDS at the rate of 1 per cent on transfer of these assets not only helps expand the tax base and check tax evasion, it will also ensure that crypto trading platforms maintain records of all transactions and report the same to the IT department. The amendments to the Finance Bill clarified that defining transfer of these assets under Section 2(47) of the Income Tax Act does not mean that they are being recognised as a capital asset. This should send a clear signal to the market that taxing cryptocurrencies does not mean that they are being legalised or legitimised in any manner. Similarly, clarifying that profit from sale of a cryptocurrency cannot be set-off against loss from sale of other cryptocurrencies also indicates the Centre’s discomfort regarding these assets.

The next step, regulating private cryptocurrencies is however likely to be much more complicated with trading activity taking place on similar unregulated platforms globally. It is very easy for traders to transact on such platforms which operate beyond any regulator’s glare. A unilateral ban on the trading in India will make traders shift to platforms in other jurisdictions. The way forward is to arrive at a global consensus on the legality of trading in these assets and the manner in which such activities should be supervised. Until then, the best way to contain activity in these assets is by taxing them heavily, as the Centre has done.