Cryptocurrency – No, Virtual Digital Assets

Virtual Digital Assets are the words of the day. And today is no ordinary day. The Finance Minister of India announces the Union Budget on first of February every year.

Armaan and Zahaan have been lapping up content on Budget expectations for the past fortnight. They’ve commented on and shared many social posts on the subject, tagging all those who matter in the delivery chain.

But now the trending hashtag is #noneventbudget. The only announcement that catches their attention is about taxation of virtual digital assets.

Armaan says he has already made some gains on his cryptocurrency investments, and needs to meet his tax advisor for further clarification.

Zahaan has been waiting for the Cryptocurrency Bill to be tabled in Parliament, before jumping on the crypto bandwagon. However, that is yet to happen.

Anyway, the tax rules are an important pointer. It means that the much-debated crypto ban is not likely to happen. The FM did not use the word ‘cryptocurrency’, but ‘virtual digital assets’.

WHAT ARE VIRTUAL DIGITAL ASSETS?

This is the official definition given by the Government of India.

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.

Source: ET

Well, prima facie it covers all cryptocurrencies, non-fungible tokens, digital currency and any new variant that may be invented in future.

“If you remember, Zahaan, this was one of the Budget Expectations – that gains on investments in cryptocurrency be taxed at higher rates, but not banned. Many people said that the genie is out of the bottle, and cannot be put back again.”

“I do. But tell me how do today’s announcements affect you?”

Armaan summarizes it for him.

“I need to pay tax at the rate of 30%, when I convert my virtual digital assets to fiat currency and book a profit. This is irrespective of the income tax bracket I’m in.

If I suffer losses, I cannot offset those against gains from other investments to reduce the tax burden.

My investments under Section 80C, 80D or anything else will not qualify for a tax deduction under this head.”

HOW DOES THE CRYPTO SCENE CHANGE NOW?

Zahan asks if the field looks safe for investments in virtual digital assets now.

“You may take the plunge, if you think the gains will outweigh the taxes that you pay. Just remember that it is a highly volatile asset class. Do not put money on it, which you can’t afford to lose.”

“Well, that is sound investment logic. But what do you think has been left unsaid here?”

“There is no mention on use of cryptocurrencies as a mode of payment. Hence, they’ve coined a new term ‘virtual digital assets’, and eliminated the word ‘currency’. The only approved currency in India is fiat currency – created by the Reserve Bank of India in physical or digital form. The RBI Governor has been talking about the digital rupee for long. The FM has now endorsed it.”

Related post: Central Bank Digital Currency

“So, I should not venture into any freelancing assignments or buying and selling, which uses crypto or coins as a mode of payment?”

“Exactly. At least, till we have further clarity on the subject.”

“Why do you think the following words have been incorporated in the definition, “a unit of account including its use in any financial transaction or investment”?

“As of now, I only see it as an elaboration of the nature of cryptocurrency. They’ve taken care not to leave any loopholes in the law. A stronger statement may ensue when the Digital Rupee or virtual currency owned by the government becomes operational.”

“How will a digital rupee help people?”

“Other than being transferable on digital platforms, it circumvents the banking system completely. Funds can be transferred directly from the digital wallet of the sender to the recipient.”

WHAT WILL INVESTORS DO NOW?

“So, now we need to see how they track movement of funds on this platform, to keep it within legal and taxable ambit?”

“You are catching on fast, Zahaan. Now decide if you would like to take the plunge in virtual digital assets or not. But only after you assess your risk appetite and risk-bearing capacity.”

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