Whether crypto trading are legal in India? Here’s everything you need to know.

Crypto in India has been growing rapidly since last year as more investors try their luck in the crypto trading. There is no official data, but industry analysts reckon there are 15 million crypto investors in India holding over 100 billion rupees ($1.37 billion) and this number is snowballing every day. Indian cryptocurrency exchanges confirm that they are adding people to their platform at a faster rate in 2021.

Despite the rapidly growing popularity of cryptocurrencies in India, a large number of investors still remain hesitate to bets on crypto assets. The lack of regulatory protection discourages many keen investors from placing bets on cryptocurrencies. Apart from that, there are some other risks that cryptocurrencies face including exposure to hacking, permanent loss in case of forgotten password, malware attacks and scams.

Recently, the Enforcement Directorate (ED) on Friday issued Show Cause Notice to one of the largest Indian Crypto-currency Exchange WazirX and its Directors Nischal Shetty and Sameer Hanuman Mhatre for contravention of FEMA (Foreign Exchange Management Act), 1999 on transactions involving cryptocurrencies worth ₹2,790.74 crore.

The main concern for the investigative agency is that none of these transactions is available on blockchain for any audit/investigation. Also, It was found that WazirX customers could transfer 'valuable' crypto-currencies to any person irrespective of his/her location and nationality without any documentation, making it a safe haven for those looking to launder money or for other illegitimate activities.

The government has the tough task to allow fintech space to flourish in India while making sure it's done without safety concerns. Let's understand the central government's stand on cryptocurrencies and their legal status in the country.

What's the government stand on cryptos ?

In 2018, The Finance Ministry had also released a statement, saying:

“The Government does not consider Cryptocurrencies “as Legal Tender or Coin” and will take all measures to eliminate the use of these Crypto Assets in Financing “Illegitimate Activities” or a Part of the Payment System The Government will explore the use of Blockchain technology proactively for assuring in Digital Economy.”

The above statement from the Finance Minister was followed by a circular from the Reserve Bank of India advised all entities regulated by it not to deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling virtual coins.

In mid-2019, a government committee had suggested banning all private cryptocurrencies, with a jail term of up to 10 years as well as heavy penalties for anyone dealing in digital currencies. However, the Supreme Court in March 2020 overturned RBI's circular, permitting banks to handle cryptocurrency transactions from traders and exchanges.

Possibility of Ban ?

Another issue that poses a risk to crypto trade in the country is the possibility of a ban. Though the government has softened its stance recently, it is still not clear whether it will go for a complete ban or regulation.

In case the government goes for a complete ban on decentralized virtual coins, investors in India could face heavy losses. However, experts familiar with virtual currencies and analyst feel that regulating crypto trade would be a better option, considering that it is emerging as the next big asset of the financial world.

Regulation rather than ban

After dilly-dallying over legalising or banning cryptocurrencies, the Indian government has taken an encouraging step towards regulating digital currencies in India. The Ministry of Corporate Affairs (MCA) has made it mandatory for companies to disclose crypto trading/investments during the financial year. Experts see it as a positive step and expect the taxation rules to follow through. This is being considered as the first step towards regulating cryptocurrencies in India.

The accounting of crypto assets is aimed at curbing illegal activities and circulation of black money via cryptos. It can also improve corporate governance with more transparent disclosures. The Centre has assured crypto stakeholders that there won't be a blanket ban on digital currencies and that it's still formulating its full opinion on the matter. Finance minister Nirmala Sitharaman has said the Centre was open to experimentation with new technologies and is not closing its minds for them.

Is cryptocurrency taxable in India ?

Yes. Cryptocurrency transactions are taxable in India. Taxes are classified under two categories, namely direct and indirect taxes. We can differentiate them based on their implementation. Direct taxes are paid by an individual or entity while indirect taxes are levied on goods and services.

Income Tax on Cryptocurrency

First, it’s important to know that the gains derived from the sale of cryptocurrencies can be classified as either capital gains or business income. This classification will decide which tax return form one needs to file and how much tax will be levied on the gains. Therefore, bitcoin could be deemed as capital assets if they are purchased for the purpose of investments by taxpayers. Any gain arising on transfer of a cryptocurrencies shall be taxable as capital gains.

GST on Cryptocurrency

So basically, Cryptocurrency is not Money. So it is covered under GST. Buying and selling of crypto currencies will be considered under the category of supply of goods and it's trading may attract 18% GST.

Is govt working on digital currency ?

While the government has some reservations regarding cryptocurrencies, it is also working on its digital currency. The government does not want to be left behind in the new age tech revolution and aims to cash in on the benefits blockchain technology offers. "The time has come to leverage its applications while at the same time strengthening the digital infrastructure," Reserve Bank of India (RBI) Governor Shaktikanta Das had said in February while announcing that RBI is working on its digital currency.

The Finance Ministry is planning to spend more time on this and soon develop a set of guidelines. when before the bill was presented, people speculated that it was unfavorable towards cryptocurrencies. But Finance Minister, Nirmala Sitharaman, cleared the air and said:

"From our side, we are very clear that we are not shutting all options. We will allow certain windows for people to do experiments on the blockchain, bitcoins or cryptocurrency."

She acknowledged that blockchain is a vast area, and growth of fintech depends on such experiments. She also said that India has an advantage in it and a lot of fintech companies have made a lot of progress on it. We have got several presentations. Much work at the state level is happening, and we want to take it in a big way in IFSC or Gift City in Gandhinagar.

Things to note here are:

The government was never against the technology; they intended to prevent the wrong usage of cryptocurrencies and blockchain.