Cryptocurrencies will be treated as an asset/commodity for all purposes, including taxation and as per user case — payments, investment or utility.
This would be the first time cryptocurrencies will be categorised as per the technology they use, but the government’s focus would be based on the end-use of the asset for regulatory purposes, sources said.
The bill is also expected to outline the tax treatment for such assets, so that it is clearly classified in the books of accounts.
“The government in its draft bill is working towards defining cryptocurrency and its treatment in various use cases, so that it can be treated correctly in the books of accounts plus it should be taxed in the right manner,” a person in the know said. “It is not looking to allow payments and settlements through virtual currencies.”
Whether for tax or for other purposes, there is no clarity as to whether crypto assets are currency, commodity, service or closer to equity.
This is a lacuna in the law, as unless an asset is defined, ambiguity of how it should be taxed or how it should be regulated becomes a question.
According to the people close to the development, the government is looking to first define cryptocurrency.
“Crypto assets can be either categorised on the basis of the technology they use or they can be defined on their end use. So, before talking about how the regulations should work, the government has to spell out what it means by cryptocurrencies,” said a person aware of the development.
ET had recently reported that crypto exchanges had made policy recommendations for regulating cryptocurrencies, including defining cryptocurrencies as digital assets and introducing a system to register home-grown exchanges.
They had suggested that India needs to recognise crypto tokens as digital assets, rather than currencies, and clarify policies in regards to exchange ownership parameters, KYC, accounting and reporting standards, among others.
“There are more than 5,000 different cryptocurrencies, each with its own different legal characteristics. Therefore, rather than the cryptocurrency technology alone, regulation should be tailored according to the end-use or activity of a particular token,” said Jaideep Reddy, leader – technology law at law firm Nishith Desai Associates.
People in the know said only the cryptocurrencies that are covered under the government’s definition will be allowed to be traded in India.
These crypto assets will then be taxed accordingly, said people aware of the development.
The government could apply something similar to security transaction tax (STT) on the trading of cryptocurrencies as well, sources said.
Apart from that, if crypto assets are categorised as commodities, the returns could be taxed as business income in the hands of the investors on the returns at normal income tax rates.
The Reserve Bank of India (RBI) had flagged off issues around cryptocurrencies in the past.
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