Open Access Research Article

GLOBAL CRYPTO REGULATIONS AND INDIAN TAXATION A HOLISTIC ANALYSIS OF POLICIES AND PRACTICES.

Author(s):
BHAGAVATH P
Journal IJLRA
ISSN 2582-6433
Published 2023/08/12
Access Open Access
Issue 7
Citation Search Scholar

Article Details

GLOBAL CRYPTO REGULATIONS AND INDIAN TAXATION A HOLISTIC ANALYSIS OF POLICIES AND PRACTICES.
 
AUTHORED BY - BHAGAVATH P
 
 
ABSTRACT:
The concept of Cryptocurrency, Virtual Digital Assets (VDAs), NFTs, and Web 3, is rapidly growing in recent years throughout the world. All the nations are facing challenges in many aspects in regulating such new forms of Currency. The main problem that every country faces is regulating and taxing the income received from such Cryptocurrency and virtual assets. Countries like India (Developing Nations) face more burden in taxing such new forms of income. This Research paper will give a clear idea about the complexities of crypto taxation in India and a comparative study between various nations.
 
This study starts by giving a clear explanation of cryptocurrency and a brief study about cryptocurrencies in India, examining the development of cryptocurrencies in India. This research paper then delves into the different sources of crypto income in India, followed by current laws in India dealing with cryptocurrency and its impact on the Indian tax system. Furthermore, this study states all the difficulties faced by the nation and the people in taxing such income from cryptocurrencies and the lack of clarity regarding the legal status and taxation of cryptocurrencies creates challenges in developing a comprehensive tax framework.
 
Furthermore, this study briefly deals with the issues in calculating the valuation of cryptocurrencies and the determination of taxable income. Many nations have different opinions on cryptocurrencies a comparative study between different nations will derive a clear outline about crypto taxation.
 
To derive possible solutions, the research delves into international best practices in crypto taxation and explores their applicability in the Indian context. Additionally, we analyze the potential of blockchain technology and distributed ledger systems to enhance tax compliance and transparency. The research concludes by delivering a possible recommendation to the Indian government and Tax authorities. These recommendations can bring Legal clarity and an approach to the potential benefits of cryptocurrencies for the growth of the nation.
 
Key Words – Cryptocurrencies, Taxation, Income, Crypto taxation, blockchain, NFTs, Virtual Digital Assets (VDAs).
 
1.               INTRODUCTION:
Significantly rapid technological advancement is taking place in every sector across the world, and there is no doubt that majority of the people don’t know about the concept of Cryptocurrencies and Virtual Digital Assets (VDAs). According to a report by Triple A (Crypto exchange) as of 2023, only 4.2% of the world's population engages in crypto transactions[1]. Cryptocurrency has significantly created more complications in different aspects. The challenges are countless when the assets become virtual assets, payments are made through tokens, and many more. According to Merriam-Webster Cryptocurrency means “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions”[2] The hike of cryptocurrencies, led by the pioneering Bitcoin, leads people to invest and trade in cryptocurrencies. The wide nature of cryptocurrencies, potential financial innovations, and decentralization motivated people to invest and trade in cryptocurrencies. This raised a question about how income from cryptocurrencies should be coupled with the existing taxation framework of the nations. In India, there is no existing law that talks about cryptocurrencies and the fear of the nation that alternative currency might create an inflection in the economy made it more complicated in establishing new laws. This research paper aims to provide valuable insights into the complex landscape of crypto taxation in India and reasonable suggestions.
 
 
2.               BLOCKCHAIN:
 Cryptocurrencies use Blockchain technology to store all the pieces of information and transactions that are partly or completely decentralized, and it mainly focuses on preventing fraudulent transactions. According to Merriam-Webster Blockchain is “a digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralized, publicly accessible network[3]”. Blockchain is being used in many sectors like Health care, supply chain management, insurance, banking, etc. Singapore is the leading country that uses blockchain technology in numerous sectors followed by the USA, China, Japan, Switzerland, Germany, and other various countries. Currently, in India, blockchain technology is an emerging concept, and people started to establish blockchain in a few sectors. The only reason for invading blockchain is it is highly secured, all the information stored will be highly protected compared to other modes. This also opened the way for the Web3 universe basically, Web3 is a developing future concept that provides access to documents, multimedia, and application through the internet by using blockchain, and decentralized tokens for exchange. Blockchain opened a great way for upcoming technological advancements like Virtual reality, Web3 games, etc.
 
3.               CHARACTERIZATION OF CRYPTO INCOME:
Generally, the income from cryptocurrencies is passive, the financial sector has a wide range of passive income opportunities such as bank deposits, stock market, bonds, and many more in recent days these cryptocurrencies are also a part of passive income methods followed by people across the world. In countries like Saudi Arabia, the income from cryptocurrencies is high and many people do it as their primary day-to-day livelihood. The income that arises out of cryptocurrencies includes numerous methods following are the most popular methods used worldwide to earn profit from cryptocurrencies.
 
·                     Crypto Investment:
The most common method involves investment in various cryptocurrencies such as Bitcoin, Ethereum, etc. The investment may be either long-term or a short term the profit depends upon the value of the cryptocurrency. This is like buying a stock, gold, or bond where the entire amount of the cryptocurrency is paid and holding the cryptocurrency for a period. If the value of the invested currency rapidly increases the investor will earn a profit. The difference between the buy price and the sell price is the amount of profit or loss the investor makes.
 
·                     Hosting lightning crypto nodes:
Income from hosting Lightning crypto nodes can be raised in many forms. The profitability of running a crypto node differs from platform to platform and other determining factors like node connectivity, channel size, demand, and performance of the Node, etc. The probable source of income from hosting a node is Routing Fees, Opening and closing Fees, Providing liquidity, contributions, commissions, etc.
 
·                     Staking:
Stacking signifies holding a certain number of cryptocurrencies in the wallet that is directly connected to the network and these stacked currencies are used for the network’s security and other functions. The income from stacking receives in the form of rewards. To receive rewards the person should engage in a Proof-of-Stake (PoS) or Delegated Proof-of-Stake (DPoS) blockchain network. This staking income differs from network to network depending upon the rate at which tokens are issued by the network, the overall quantity of tokens staked, and the proportion of staked tokens held by the stalker.
 
·                     Crypto Mining:
Crypto mining is the traditional and common form of earning from cryptocurrencies. Mining is the process of validating the transactions and approving a block to a blockchain network through computer power. Most cryptocurrencies use Proof-of-Work (PoW) as their consensus mechanism. For approving every transaction reward is received in the form of that respective currencies. The different mining process includes Transaction validation, proof of work, adding new blocks, and network security. Due to the substantial energy requirement, crypto mining has been prohibited by numerous countries, posing a significant challenge in the mining industry.
 
·                     Airdrop:
Airdrop means the distribution of free tokens or cryptocurrencies or coins for a particular people who fulfill certain criteria, these airdrops are used as a great marketing strategy to reward existing customers and distribute new currency to the audience. Airdrops vary widely depending upon the nature of the currency and tokens.
 
·                     Gaming rewards:
The easiest way in earning crypto is from gaming, many gaming platforms use crypto as a reward. Most crypto games in the world are based on Play To Earn(P2E) concept. Different games offer different reward systems in the form of tokens. The rewards vary from game to game according to their terms and conditions.
 
·                     Crypto trading:
Crypto trading is nothing but the same as stocks and commodity trading. The trader either does an intraday or a swing trade or a long term according to his possibility. The risk factor in this trading is very high as the cryptos are highly volatile. Currently, most people prefer to do crypto trading rather than investment. Crypto trading requires higher knowledge and techniques. According to a survey by Lending Tree “38% of Americans who’ve held a form of the currency say they’ve sold it for less than when they bought it, versus 28% who say they made a profit. Only 13% say they broke even”[4].
 
4.               GLOBAL TAXATION ASPECT OF CRYPTOCURRENCIES
The rapid acceleration of crypto assets to a highly debated and influential position has been remarkable, with innovation progressing at an astonishing speed. Beginning from its inception in 2008, the market value of crypto assets surged to an all-time high (thus far) of approximately USD 3 trillion in November 2021. All the nations are struggling to accommodate cryptocurrencies into their taxation system.  The rapid growth of Bitcoin motivated people to think about cryptocurrencies meanwhile, most countries fail to accommodate such income with their tax policies. Given the rapid emergence of this novel concept, it is understandable that many nations encounter challenges in comprehending the nature of this income. Developed nations have a simpler approach to taxing crypto income compared to developing nations. By tracing the chain of actions in cryptocurrencies issues arises in respect of both direct tax (income tax) and indirect tax (VAT).  Significantly cryptocurrencies have two natures a medium of exchange and an investment asset therefore, it becomes more complicated for all the nations to determine the nature of the income. A question arises why income from fees, reference, and establishing new crypto cannot be treated as the same income from the business. Countries like India feared economic inflation stating that an alternative mode of exchange might create a parallel currency that will result in an economic crisis.
 
·                     Income Taxation (Direct Tax):
There are three major ways in which cryptocurrencies might be classified for Income-tax either as an Asset or property, Investments, or foreign currency. The interpretation will differ from country to country according to their domestic laws. For instance, many countries exempt capital gains from foreign currencies. Similarly, when it is classified as a property it results in a capital gain tax. For instance, in India, cryptocurrencies are classified as property. This means that any capital gains from transactions must be reported, and if the cryptocurrency is held for more than 3 years, a lower tax rate than ordinary income applies (long-term capital gain). If cryptocurrencies were classified as currency instead, all the gains would be subject to ordinary income tax. The same difficulties arise worldwide when it comes to treating cryptocurrencies as property. This involves the need to calculate the gain or loss for each transaction.
 
Some nations have drawn an analysis between cryptocurrencies and gambling saying that the income from cryptocurrencies must be treated in the same way. There are a few countries like Germany, France, and Luxembourg that charges more than 50% tax for income from gambling.  Simultaneously in India income from cryptocurrencies is treated as gambling a flat 30% of tax is being imposed. The UK Parliament Treasury Committee has suggested that cryptocurrency trading should be classified as gambling rather than a financial service. They have also called for regulations to be implemented in the industry. CryptoUK strongly rejects Treasury Select Committee’s crypto ‘gambling’ claim[5]. This again creates a big conflict about whether gambling and cryptocurrencies are the same.
 
Most nations failed to give a clear explanation why gambling and crypto are the same the only reason every nation says is a high-risk factor meanwhile by considering only the risk factor crypto cannot be treated as gambling. On the other hand, trading in derivatives, forex, and commodity are not gambling. Countries like Dubai have a well-established tax framework for cryptocurrencies.
 
In general, Dubai is considered a tax-free country. The government of Dubai thinks that cryptocurrencies don’t create any economic problems directly or indirectly or for their domestic tax system therefore nothing to bother about cryptocurrencies and all the income from cryptocurrencies is treated as the same income from capital gains. In practice, most nations like Europe, Malaysia, and Singapore, consider cryptocurrencies as capital gains from financial assets that are either not taxed or exempted after a relatively brief period of holding.
 
·                     VAT and Sales Taxation (Indirect taxation):
Here again, the question arises whether the crypto is VAT exempted or liable VAT means Value Added Tax that is imposed on a supply chain from the protection level to the marketing level at every stage of value added to the material. Significant acquisition of cryptocurrencies for FIET money cannot be only the reason for imposing a VAT.  The income arises from cryptocurrencies either in the form of reference, Mining, Trading, or rewards this does not add any value therefore many nations like the European Union have exempted VAT from crypto transactions. Significantly Iris revenue on the view that VAT is imposed on the supply of any goods and services therefore supply of any cryptocurrencies should be imposed to VAT as like other commodities.  The VAT taxation on fees and newly mined cryptocurrencies needs a clear policy, in simple there is no clear explanation why it should be VAT exempt. In reality, numerous value-added taxes (VATs) exclude fees for financial services. As a result, there is excessive taxation on the business utilization of cryptocurrency due to miners' inability to recover input VAT, while individual use is not adequately taxed which might result in over-taxation on crypto income.
 
5.               CRYPTO LEGISLATION IN LEADING NATIONS
The concept of understanding the nature of cryptocurrency differs from country to country. As it is multidimensional in nature every nation has its own opinion on cryptocurrency and income from cryptocurrency based on their domestic laws. A comparative study between different nations like the USA, Saudi Arabia, Singapore, Europe, China, and Vietnam will give a clear understanding of crypto taxation.
5.1           AMERICAN LEGISLATION
Since 1870, the USA has maintained the highest gross domestic product in the world. The USA is a well-grown economy that plays a major role in determining commerce, finance, and trade over the world. The US is the home of many crypto exchanges and other crypto-related businesses.  The evaluation of Bitcoin in the US market is unpredictable, the US regulation on cryptocurrencies is still consistent as of now a patchwork was done and is being implemented across the states. Over the years, cryptocurrency regulations in the United States have adapted to tackle the distinct challenges presented by digital currencies. The focus of these regulations has been primarily on existing financial laws and safeguarding investors, preventing fraud, and ensuring compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations. Both federal and state governments focus on developing regulations on cryptocurrencies. Commodity Futures Trading Commission (CFTC) is the important body of crypto regulations. As per CFTC Bitcoin and Ethereum are commodities. The recent ruling of the CFTC implies that cryptocurrency exchanges dealing with these assets will now be regulated by the CFTC. Additionally, the CFTC has released multiple guidance letters regarding cryptocurrency, offering further insight into its regulatory approach toward this particular asset category.
 
Internal Revenue Service (IRS) released a report in 2014, that classified cryptocurrencies as property for tax and instructed everyone to report their profit and loss when they sell or exchange the cryptocurrencies failure to enclose will be penalized.
 
The Financial Crimes Enforcement Network (FinCEN), a U.S. Department of the Treasury Bureau was controlling cryptocurrency exchanges and administrators as money services businesses (MSBs) and made a mandate to register with FinCEN. Since 2017 Securities and Exchange Commission (SEC) is an important body dealing with cryptocurrencies. In early 2017 SEC issued a report stating that the Initial Coin offering will fall under the preview of securities. Security Exchange Commission ruling Initial Coin Offerings (ICO) as securities. This ruling implies that ICOs must adhere to the same regulations as conventional securities offerings. These regulations encompass registration with the SEC and adherence to anti-fraud laws. The Commodity Futures Trading Commission (CFTC) has control over exchanges dealing with Bitcoin and Ethereum. Meanwhile, The Securities and Exchange Commission (SEC) has control over Initial Coin Offerings (ICO).
“I assume [the IRS] decided this because most people hold crypto as an investment, and we tax the appreciation on capital assets held as an investment,” said Jeff Hoopes, Associate professor of accounting - University of North Carolina and research director - UNC Tax Center.
 
5.1.1      TAXATION OF CRYPTO IN THE USA
Significantly cryptocurrencies are considered capital and profit arising out of buying and selling of cryptocurrencies is considered as capital gain if the holding period is more than a year. If the time is less than one year, then the income will be considered as normal income from business and taxed ordinarily which is higher than capital gain. If cryptocurrency is received as wages, the employer will report it at its fair market value on W-2, also known as the "Wage and Tax Statement." which needs to be reported in the income tax return and pay ordinary income taxes on the received amount. In the 2023 tax year, the capital gains tax rates will be set at 0%, 15%, and 20%. These rates will be applicable if the cryptocurrency is held at least for one year, and if the selling price exceeds the original purchase price. However, if the holding period is less than one year then it will be taxed ordinarily (federal income) which will range between 0 – 37% depending upon the net profit made during FY 2023.  Set off and carry forward of losses are allowed. losses from cryptocurrency transactions can be offset by any profits. Moreover, the loss can be carried forward to the upcoming year.
 
 
The long-term capital gain tax rate (2023)
 
Tax-filing status
0% tax rate
15% tax rate
20% tax rate
Single
$0 to $41,675
$41,676 to $459,750.
$ 459,751 or more.
Married, filing jointly
$0 to $83,350
$83,351 to $517,200.
$517,201 or more.
Married, filing separately
$0 to $41,615
$41,676 to $258,600.
$258,601 or more.
Head of household
$0 to $55,800
$55,801 to $488,500.
$488,501 or more.
 
The tax rate for income from cryptocurrencies holding more than one year.
 
Federal Income tax rate (2023)
 
Tax Rate
Single
Married, filing jointly
Married, filing separately
10%
$0 to $11,000
$0 to $22,000
$0 to $15,700
12%
$11,000 to $44,725
$22,000 to $89,450
$15,700 to $59,850
22%
$44,725 to $95,375
$89,450 to $190,750
$59,850 to $95,350
24%
$95,375 to $182,100
$190,750 to $364,200
$95,350 to $182,100
32%
$182,100 to $231,250
$364,200 to $462,500
$182,100 to $231,250
35%
$231,250 to $578,125
$462,500 to $693,750
$231,250 to $578,100
37%
$578,125 or more
$693,750 or more
$578,100 or more
 
The tax rate for income from cryptocurrencies holding less than one year.
 
5.2           EUROPEAN UNION’S LEGISLATION
European Union has emerged as a significant and powerful economy with a Gross Domestic Product (GDP) of $16.6 trillion in 2022, European unions have the most structured and clear framework for cryptocurrencies in the world. Cryptocurrencies are legal in European Union states, but the regulations differ from member states. Most of the EU states tax the income from cryptocurrencies as capital gain, but not all the member countries are following the same. Significantly Europe is the second largest country in the world that holds 25% of overall cryptocurrencies. EU also ruled that cryptocurrency exchange must be exempt from Value Added Tax (VAT). The EU always focuses on creating a structured legal framework which ultimately resulted in establishing various regulating authorities to regulate cryptocurrencies.
 
In early 2020 EU EU’s Fifth Anti-Money Laundering Directive (AMLD) came into effect to provide a clear awareness of the investment in cryptocurrencies and provides a clear explanation of cryptocurrencies and digital assets. The fifth Directive lays down that all the exchanges should provide Keep Your Customers (KYS) details which becomes a requirement for all the exchanges. Even though the fifth AMLD was made to improve the fourth AMDL. The fifth AMLD defines Cryptocurrency as “a digital representation of value that can be digitally transferred, stored or traded and is accepted by natural or legal persons as a medium of exchange[6]”. Further, (8) of Fifth AMLD laid down the differentiation between cryptocurrency and fiat money.
 
“(8) Providers engaged in exchange services between virtual currencies and fiat currencies (that is to say coins and banknotes that are designated as legal tender and electronic money, of a country, accepted as a medium of exchange in the issuing country), as well as custodian wallet providers, are under no Union obligation to identify suspicious activity[7]”.  Which clearly says that cryptocurrencies are accepted as a medium of exchange.
 
Fifth AMDL further provides that Financial Intelligence Units (FIU) have the full authority to regulate and monitor Virtual currency exchanges and individuals. And all the cryptocurrency entities are entitled to register themselves under FIU as ‘obliged entities’ compulsorily. The non-EU entity can also establish their exchanges in the EU by obtaining a passport. The European Union (EU) is currently engaged in extensive research and discussions regarding additional regulations for cryptocurrencies. A draft document from the EU has highlighted concerns regarding the potential risks posed by privately issued digital currencies. Concurrently, the European Central Bank (ECB) has acknowledged that it is contemplating the feasibility of introducing its digital currency. Some states in the EU have different opinions on cryptocurrencies.
 
Baltics - The Bank of Latvia and the State Revenue Service state that cryptocurrency is not a statutory mode of payment it is contractual in nature. They are also of the view that cryptocurrencies cannot be considered as an official currency or a common mode of exchange as there is no regulating authority and not linked with any national currency. So, Baltic states are not ready to cope with the growing digital currency.
 
Lithuania – Lithuania is the state that is considered cryptocurrencies unregulated. Many EU exchanges have their home in Lithuania. The state has an official permit to conduct and regulate cryptocurrency business.
 
Estonia - Estonia is the only state that has a clear regulatory framework for cryptocurrencies. Cryptocurrency exchange in Estonia will be strictly regulated by KYC/AML rules.
 
Belgium – Belgium does not have many regulations regarding cryptocurrencies therefore, any exchange can issue a cryptocurrency without any license. The National Bank of Belgium just warned the investors and public about the danger of cryptocurrencies and digital assets.
 
Markets in Cryptoassets (MiCA) Regulation is the first crypto legislation Adopted on April 20, 2023, by the European Parliament. The MiCA will come into complete existence by early 2025. In October 2022, the European Union achieved a policy consensus on the Markets in Cryptoassets (MiCA) Regulation. This groundbreaking regulatory framework for crypto assets has now been ratified by the European Parliament, making it the first of its kind globally. MiCA mainly focuses on issuer and service providers to protect the investors and public interest. MiCA defines a crypto asset as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.”[8] MiCA distinguishes Cryptocurrency and Tokens. MiCA strictly laid down that the crypto issuers must provide a brief and transparent report about the issuing currencies and comply with the transparency regulation. Crypto service providers must provide all the information about the services and follow all security measures and anti-money laundering compliances. MiCA classifies the cryptocurrencies as 1. Asset-referenced tokens (ARTs), 2. 2. Electronic money tokens (EMT) 3. Utility tokens. MiCA excludes some cryptocurrencies namely Decentralized Finance (DeFI) and Non-fungible tokens (NFTs) differ from cryptocurrencies as they are distinct and cannot be divided. They serve as representations of exclusive digital assets such as artwork, videos, tweets, or other unique items. Unlike cryptocurrencies, which can be exchanged for others of equal value, NFTs are one-of-a-kind and supported by unique assets. It is important to note that central bank digital currencies (CBDCs) are also not included within the scope of MiCA. MiCA also focuses on environmental factors some crypto mining requires an unreasonable energy source and generates more computer waste. MiCA also states that crypto transfers are regulated by the Transfer of Funds Regulation (TFR) which brings financial transparency to the crypto market. MiCA emerges as the frontrunner of legislation for cryptocurrencies, and it is crucial to establish similar frameworks worldwide to regulate these digital assets effectively.
 
5.2.1      TAXATION OF CRYPTO IN THE EU NATIONS
In the EU tax rates differ from state to state, most of the states treat income that arises from the sale of cryptocurrencies as a capital gain, and states exempt crypto exchanges from VAT. The tax rate is fixed according to their domestic law, leading European States' tax rates on cryptocurrencies are as follows.
 
Italy: In January 2023, the Italian government introduced its new tax regime on income from crypto and digital assets.  The income is considered miscellaneous income and a flat 26% tax is imposed on gains whenever the gain from cryptocurrencies is higher than EUR2,000. Earnings that are below EUR2,000 are not liable to any form of tax. Further, there is no difference between long-term and short-term crypto gains. Additionally, under the new regime set off and carry forward of losses are allowed. losses exceeding EUR2,000 from cryptocurrency transactions can be offset by any profits. Moreover, the loss can be carried forward to the upcoming year. Simultaneously the taxpayer has the option to substitute value tax. As of January 1st, 2023, Italian taxpayers can declare the worth of their crypto holdings and digital assets to avail of a deduction they are liable to pay a 14% tax on the value of their holdings then. This system provides an incentive for taxpayers to ensure that their cryptocurrency holdings are properly accounted for in their tax returns. Gains from Mining, Lending, and staking of crypto are taxable under general income there is no special provision under the Italian framework.
 
Spain: Spain has a complex tax system, In Spain, the PIT (personal income tax) is paid by individual residents. The PIT is categorized into two parts: General taxable income and savings taxable income. Savings taxable income includes capital gains and interest, while general taxable income encompasses most other forms of income such as wages and payments. Purchasing and selling of cryptocurrencies with fiat currency are exempt from Value Added Tax (VAT). When income from crypto is in the form of selling, trading, swapping, or otherwise disposing of an asset in exchange for crypto or fiat then the gain from those transactions is considered as capital gain (savings taxable income). Capital gains are subject to a progressive tax rate that varies between 19% and 26%. Traders and investors are subjected to disclose their holdings of crypto if the value exceeds EUR50,000. In Spain, wealth tax is calculated when the value of assets is greater than 700,000 EUR therefore while calculating the value of assets the value of crypto holdings is considered. Set off and carry forward of losses are allowed. losses from cryptocurrency transactions can be offset by any profits. Moreover, the loss can be carried forward to the upcoming year.
 
The tax rate for Savings taxable income
Savings taxable income
Tax Rates
Up to 6,000 EUR
19%
>6,000 EUR ? 50,000 EUR
21%
>50,000 EUR ? 200,000 EUR
23%
Over 200,000 EUR
26%
 
When a crypto is mined then it will be considered as general taxable income and the rate of tax is slightly higher than capital gains.
 
The tax rate for General Taxable income
General taxable income
Total tax rate (state + regional)
Up to 12,450 EUR
19%
> 12,450 EUR ? 20,200 EUR
24%
>20,200 EUR ? 35,200 EUR
30%
>35,200 EUR ? 60,000 EUR
37%
>60,000 EUR ? 300,000 EUR
45%
Over 300,000 EUR
47%
 
United Kingdom (UK): In the United Kingdom (UK) the income from cryptocurrencies is classified into both capital gain and general income. When a cryptocurrency or digital asset is being held in the form of capital it is considered as capital gain, it can be either long-term or short-term. Income from Getting paid in crypto, staking rewards, mining tokens, and airdrops are considered as income and subjected to income tax. If the transaction is in the form of capital, then capital gain tax is applicable meanwhile, if the nature of the transaction is revenue, then income tax is charged. In the 2022-2023 tax year, taxpayers in the UK enjoyed a tax-free allowance of EUR 12,570 for Capital Gains.  Set off and carry forward of losses are allowed. losses from cryptocurrency transactions can be offset by any profits. Moreover, the loss can be carried forward to the upcoming year. Any capital gain income exceeding the limit of EUR 12,570 is subject to the following tax rates except for Scotland.
 
Capital Gain Tax Rate 2023
 
Tax Rate
Taxable income
10%
Income band up to EUR 50,270
20%
Income band up to EUR 1,50,000
20%
Income band more than EUR 1,50,000
 
 
 If the nature of the income is revenue, then the following income tax rate is applicable:
 
Income tax rate 2023
Band
            Taxable income
Tax rate
Personal Allowance
Up to £12,570
0%
Basic rate
EUR12,571 to EUR50,270
20%
Higher rate
EUR50,271 to EUR125,140
40%
Additional rate
over EUR125,140
45%
 
 
 
6.               SAUDI ARABIA LEGISLATION
Over the past 25 years, Arabic countries have consistently maintained a strong and stable economy, making them the fastest-growing economy in the world. They also boast the largest economy in the Middle East. This economic success can be attributed to the booming oil-exporting projects that took place during the 1980s and 90s. Due to the significant profits earned from oil exports, most Arab countries do not impose limitations on taxation. Notably, Saudi Arabia holds the second-largest cryptocurrency capital globally and has no restrictions or legislation in place to regulate cryptocurrencies. As a result, many mining companies have chosen to establish their headquarters in Saudi Arabia. In Saudi Arabia, cryptocurrency can be used as a medium of exchange and people are free to deal with buying and selling of cryptocurrencies. According to numerous economists, Arab countries have sufficient resources to sustain their governments without relying on taxes. As a result, these countries show little concern about implementing regulations on cryptocurrencies.
 
7.               INDIAN LEGISLATION
India, the world's fifth-largest economy, possesses a mixed economy. It is a developing nation where the agricultural and service sectors contribute significantly to most of its income. The Reserve Bank of India (RBI) is India's central bank, entrusted with the task of regulating and supervising the nation's monetary and financial system, established on April 1, 1935, as per the Reserve Bank of India Act, 1934. The RBI holds a pivotal position in ensuring financial stability, crafting monetary policies, circulating currency, managing foreign exchange reserves, and overseeing the banking industry. The digital currency was still a developing concept in India. Cryptocurrency made its debut in India towards the end of 2009 with the introduction of Bitcoin. The first transaction took place in 2010, and the first cryptocurrency exchange was established in early 2013. The Reserve Bank of India (RBI) has expressed caution regarding cryptocurrencies, primarily due to worries about issues such as money laundering, terrorist financing, and safeguarding consumer interests. In 2018 RBI issued a circular that entities dealing with virtual assets are banned and made it illegal for bankers to provide any service to cryptocurrency exchanges. Later the supreme court on 4 March 2020 lifted the ban on cryptocurrencies stating that this violates Article 19(1)(g) “Right to practice any profession or to carry on any occupation, trade or business[9]”. And no legislation in India states cryptocurrencies are illegal, therefore cryptocurrencies are legal in India. RBI was in view that these virtual currencies might affect fiat money if they are uniformly used as a medium of exchange across the country and such a situation will cause inflation. At that time, there were no specific regulations or governing authorities overseeing cryptocurrencies in India. There are several arguments in parliament regarding regulations, RBI states that regulation will prevent some illegal activities like money laundering, terrorist funding, etc. However, the Finance Act of 2022 marked the first step toward implementing laws to regulate cryptocurrencies in the country.  
 
7.1           THE FINANCE ACT 2022
 The Finance Act 2022 (Bill Passed by parliament on April 2022) marked a significant milestone in India as it introduced provisions regarding Virtual Digital Assets (VDA), encompassing various forms of digital assets. This act offers definitions for VDA and tokens, as well as guidelines for taxation purposes. An amendment was made to section 2 of the Income Tax Act, and section 2(47A) was added to provide a clear definition of Virtual Digital Asset (VDA). Section 115BBH was added by this act which provides details about the taxation of income from VDA.
 
"Virtual digital asset" means—
Section 2 (47A) (a) “any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value 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 including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically[10]”
 
 
 
 
7.2           CRYPTO TAXATION IN INDIA
The Finance Act 2022 states that any income earned from Virtual Digital Assets (VDA) will be classified as capital gains and subject to taxation. Additionally, the Act treats VDA transactions as barter transactions for GST purposes, requiring the payment of GST accordingly.
 
Income Tax – The Finance Act 2022 inserted Section 115BBH to the Income Tax Act, which laid that gains arising from the transaction of VDA are taxed at the rate of 30% plus 4% cess. Starting from July 01, 2022, Section 194S mandates a 1% Tax Deducted at Source (TDS) on the transfer of cryptocurrency assets. This applies if the transactions exceed ?50,000 (or in certain cases, ?10,000) within the same financial year. It is mandated for all exchanges dealing with VDA should deduct TDS and report to the government. The total amount of TDS deducted can be claimed under Form-6A. Income received from VDA includes all forms of income i.e., any form of income received through any activity of VDA are taxable in the same manner. Includes Mining, Trading, Staking, Airdrop, vesting of tokens, referrals, Crypto gifts exceeding ? 50,000, etc.
 
Section 115BH (a) “the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of thirty percent[11]”
Set off and carry forward of losses are restricted under section 115BBH (2). This means that no deduction in respect of any expenditure (other than the cost of acquisition, if any) or allowance or set off any loss shall be allowed to the assessee under any provision of this Act[12]. The losses from cryptocurrency transactions cannot be offset by any profits (Income from the same head & Income from different heads). Moreover, the loss cannot be carried forward to the upcoming year. The gain from transferring VDA is not eligible for any type of deduction except the cost of acquisition.
 
For example, let's consider Mr. A who invested Rs 50,000 in Bitcoins and later sold them for Rs 70,000. Additionally, he purchased Ethereum worth Rs 30,000 and sold it for Rs 20,000. During these transactions, the exchange deducted a trading fee of Rs 1,000. In this scenario, it is not permissible to offset a loss of Rs 10,000 against gains of Rs 20,000. The entire income of Rs 20,000 is subject to a 30% tax rate. Additionally, the trading fee of Rs 1,000 cannot be deducted.
Goods and Service Tax (GST) – GST is a Value Added Tax in many countries, maximum of countries exempt cryptocurrencies from VAT as it doesn’t add any value to the supply chain. But in India, the concept of VAT was not in existence instead Goods and Service Tax (GST) was in force. Significantly GST is collected on the supply of goods and services in a country. If GST is applicable, then the supplier has to charge the GST on his supply and remits it to the government. Meanwhile, the recipient of the supplied goods or services usually has the right to claim a credit for the Goods and Services Tax (GST) paid on that supply. This credit can be utilized to offset any GST obligation that the recipient needs to pay on their own provided goods or services. The GST Act does not provide any information about cryptocurrencies, considering the Finance Act 2022 the Central Board of Indirect Taxes and Customs (CBIC) has clearly stated that Cryptocurrencies are not currencies or a medium of exchange it falls under the preview of goods and services only, therefore, supply of cryptocurrencies are taxable under GST @ 18%.
 
When an individual acquires cryptocurrency as an investment, the acquisition itself typically does not incur Goods and Services Tax (GST). This exemption arises from the fact that procuring a capital asset like cryptocurrency is not categorized as a taxable supply under GST regulations.
 
Similarly, when an individual sells cryptocurrency that they have retained as an investment, the transaction generally does not attract GST. This exemption is rooted in the principle that selling a capital asset, such as cryptocurrency, is not regarded as a taxable supply for GST purposes.
 
Top of Form
If an individual uses cryptocurrency to buy or sell any product or service then the transaction is subjected to GST, because payment is considered a mode of exchange for the supply of goods or services. When any payment is made through any form of VDA then the supplier should collect the GST on the value of the supply he made. In some cases like exchanging VDA with VDA, the transaction is considered barter, in barter there is an exchange of supply of goods or services for other goods or services, where the supplier is entitled to collect GST on the value of the transaction made not on the value of currency.
 
 
8.               PROPOSED REGULATORY FRAMEWORK FOR INDIA
India currently lacks a comprehensive legal framework governing cryptocurrencies and digital assets. The enactment of the Finance Act of 2022 offered preliminary insights into Virtual Digital Assets (VDAs) and their taxation. However, the tax provisions contained within the Finance Act of 2022 appear to possess a degree of unreasonableness and may be susceptible to claims of infringing upon the principles of natural justice.
 
The pivotal query arises regarding the characterization of the income sourced from VDAs. Should VDAs be classified as assets, consequent gains should be treated as capital gains, thereby entailing the right to offset and carry forward incurred losses. The imposition of a tax rate of 30%, appears to exhibit a lack of reasonableness.
 
In light of the aforementioned considerations, the following are the reasonable recommendations:
1.                  Undertaking a Comprehensive Regulatory Framework: The legislative body should formulate an all-encompassing regulatory framework like the Markets in Cryptoassets (MiCA) Regulation that holistically addresses the multifaceted aspects of cryptocurrencies and digital assets, encompassing legal, economic, and Consumer protection dimensions.
2.                  Reasonable Taxation Structure: Deliberation upon establishing a taxation structure that duly accounts for the complexities intrinsic to cryptocurrencies, while concurrently aligning with principles of fiscal prudence and reasonableness. Loss accrued from the crypto transaction should be allowed to offset the profit from the crypto transaction. Like most of the leading nations exempt from VAT, India can free crypto from GST. Income from VDA can be classified into two heads long-term capital gains and general income. (Paris & US legislation are considerable).
3.                  Ensuring Legal Certainty: Fostering a legal environment that offers clarity and certainty concerning the legal status and implications of cryptocurrencies, thereby mitigating potential ambiguity, and fostering investor confidence.
4.                  Consideration of International Best Practices: Drawing insights from the regulatory frameworks of other jurisdictions renowned for their progressive stance on cryptocurrencies, thereby facilitating the crafting of a balanced and effective regulatory landscape. Most EU countries have a fair legal framework for cryptocurrencies that can be taken into consideration.
 
9.               CONCLUSIONTop of Form
The realms of cryptocurrencies and Web3 are characterized by their dynamic and swiftly progressing nature. The upcoming generation of projects is firmly rooted in the principles of Web3. The concept of decentralization has captivated the interest of a wide range of individuals, and its impact on the economy is multifaceted, encompassing both positive and negative aspects. Consequently, it becomes imperative for nations to formulate a clear and structured legal framework that caters to the needs of individuals within this evolving landscape. The effect of cryptocurrencies on taxation led to a variety of regulatory reactions within various jurisdictions. Numerous countries have aimed to find an equilibrium between capitalizing on the potential advantages of cryptocurrencies and protecting against several risks like money laundering, fraud, and tax evasion. A delusional idea about global taxation on cryptocurrencies is essential to frame legislation.
 
A comparative study between various nations' taxation models gave a hybrid framework that can be considered in India. From the study, it is evident that creating a framework for the taxation of crypto requires a balance between the domestic tax system and the international tax system. India should structure a strong legal framework to regulate cryptocurrencies and crypto taxation. The global comparative study stands as a strong resource for decision-making and developing legal clarity.
 

[2] Cryptocurrency – Merriam-Webster https://www.merriam-webster.com/dictionary/cryptocurrency  (07 August 2023)
[3] Blockchain – Merriam- Webster https://www.merriam-webster.com/dictionary/blockchain (07 August 2023)
[7]  (8) of Fifth AMLD – Fifth AMLD - https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32018L0843 (10 August 2023)
[9] Article 19 – Constitution of India
[10] Income Tax (Amended) Act, 2022 – SE 2 (47A) (a) – No. 24 Acts of Parliament, 2022(India)
[11] Income Tax (Amended) Act, 2022– SE 115BH (a) - No. 24 Acts of Parliament, 2022(India)
[12] Income Tax (Amended) Act, 2022– SE 115BBH (2) - No. 24 Acts of Parliament, 2022(India)

Article Information

GLOBAL CRYPTO REGULATIONS AND INDIAN TAXATION A HOLISTIC ANALYSIS OF POLICIES AND PRACTICES.

Authors: BHAGAVATH P

  • Journal IJLRA
  • ISSN 2582-6433
  • Published 2023/08/12
  • Issue 7
Citation Full Details Search on Google Search on Google Scholar

About Journal

International Journal for Legal Research and Analysis

  • Abbreviation IJLRA
  • ISSN 2582-6433
  • Access Open Access
  • License CC 4.0

All research articles published in International Journal for Legal Research and Analysis are open access and available to read, download and share, subject to proper citation of the original work.

Creative Commons

Disclaimer: The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of International Journal for Legal Research and Analysis.

Current Issue

Ethics and Policy

For Authors