India’s Finance Minister, Nirmala Sitharaman, on the 1st of February, finally ended the uncertainty surrounding HODLing and trading cryptocurrencies.
Here’s the entire draft should you wish to read it, but who has the time for that?
Here are the two relevant sections (as screenshots) on:
The Digital Rupee
Taxation of Virtual Digital Assets
Let’s go over each of the lines to better understand what they want to spell out (before journalists botch this up)
The Digital Rupee: What It Means
Line 1: Introduction of Central Bank Digital Currency (CBDC) will give a big boost to digital economy.
No shit, Sherlock!
A CBDC, despite it failing all of the tests of a generally accepted understanding of a cryptocurrency, is very similar to what we have as certain stablecoins today.
For example, Tether ($USDT) and $USDC are two of the most popular stablecoins the market today and, this may come as a shocker - are just like CBDCs except for the fact that they’re centrally controlled by private organizations while the CBDCs shall be centrally controlled by the Governments.
When centralized exchanges get hacked (or DeFi protocols get ‘compromised‘), the crypto-native smart hacker immediately converts their funds to a decentralized stablecoin like a DAI or even a MIM (Magic Internet Money) and makes it untraceable on services like Tornado Cash.
The novice hacker, on the other hand, sits on a bag of USDT which promptly gets frozen by the overlords over at Tether Inc.
Similarly, a CBDC (Digital Rupee or a Digital Yuan) can be blocked/locked/seized by Governments on grounds of money laundering/terror financing/personal whims.
(Seizure is an interesting use case here as we do not know, as of now, which Blockchain would these CBDCs use. If it is a public Blockchain like Ethereum or a Fantom, a seizure is going to be impossible. BUT, if it is a private chain like a Hyperledger flavor or a (cough) Solana, it can technically be seized)
Line 2: Digital currency will also lead to a more efficient and cheaper currency management system.
This makes me cautiously optimistic but having lived in India for over 30 years now, I have no hesitation in saying that - Bureaucrats are going to fuck this up!
To make it more efficient, you need to use a public Blockchain - period. On private chains, you’re hiring people to run nodes, and based on what we’ve usually seen - it becomes an expensive task for most individuals and the market gets cornered by big companies.
It would still definitely be cheaper currency management, for sure.
No need to print currency notes (hopium), or destroy old ones, transfer logistics for ATMs, and even banks - all those become obsolete. Technically, Govts are the best suited to eat the banks!
However, they’re usually joined at the hip and one keeps the other afloat - so fat chance of that happening!
What might end up happening though (more hopium) is that banks end up becoming the nodes/validators for transactions and become like server farms that no one but the nerd cares about.
Fewer people, more automation. LFG!!!
Line 3: It is, therefore, proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23.
We aren’t Japan so let’s not expect timeliness here.
However, if (hopium overload) they decide to launch it as a token on Blockchains with standardized token standards such as an ERC20 on an Ethereum, a TRC20 on TRON (lol), etc, they could launch within a week.
IreneDAO was launched in under a day, they can take a week!
Technically, by using the word ‘blockchain and other technologies’, the Indian Govt. has indicated that Hyperledger, Stellar, and Solana are out of the running. Arguments that suggest that they never were in the running are 100% valid.
Scheme for taxation of virtual digital assets
Line 1: There has been a phenomenal increase in transactions in virtual digital assets.
When the fixed deposit rates are 5% and inflation eats that all up, people are going to YOLO it on sick 79,000% APYs on Wonderland - and still lose their money <wink, wink>
What is interesting though is that simply HODLing bitcoin over the years beat the stock market, the housing market, and the gold market, combined!
So, yes! There has been a phenomenal increase in transactions in virtual digital assets.
h/t Satoshi Nakamoto
Line 2: The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.
“Only death and taxes are certain“
When you trade stocks all day (like my dad), the Govt. makes money on every sale and purchase. This is called the Securities Transaction Tax.
Crypto-transactions were not within the ambit of the STT and this line implies that, if you’re trading cryptocurrencies in India, you’ll be paying the following fees:
- [ ]GAS (just use Avalanche, bro!)
- [ ]Trading fees
- [ ]STT
How this would be calculated on non-Indian exchanges such as a Binance or a Kraken is anybody’s guess. There was an earlier news piece though, that said Indians would be ‘expected‘ to trade only on Indian exchanges - like that’s gonna happen when you compare to something like a Binance (funds are SAFU) to something like a Gate.io (insane APYs).
The case with decentralized exchanges is even weirder. I would like to see the proposal they send to someone like a SpookySwap to add an STT component before processing my $BOO purchases. Seriously, I want to see that!
With words such as ‘imperative to provide for a specific tax regime’, it is clear that the Govt. will nudge us to use Made-In-India exchanges and lose out on all of the insane high-risk, high-reward plays. Maybe, this is an opportunity to build decentralized wallets like metamask that connect to any exchanges and enable you to track your STT. That goes against everything crypto stands for but hey - only death and taxes are certain.
Line 3: Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent.
The keyword everyone seems to be missing is income from transfer of any virtual digital asset.
By doing this, the Govt. is differentiating between a digital rupee and a digital asset.
If I own (I wish) 1 BTC that I (I wish) had purchased at the price of $3,000 and sell it today at $38,000 (time of writing: 2nd Feb 2022), my income is $35,000 and I must pay:
30% of $35,000 = $10,500 as taxes.
The remaining $24,500 stays with me as profit!!
This is not black money (as we Indians call it) anymore.
THIS IS HUGE NEWS!!!!!!
This is why people are celebrating - at least the ones who actually own substantial crypto.
What is also interesting is that if it is not considered income, IT SHALL NOT BE TAXED.
So, what is not an income?
I tried googling it but all I could find was non-taxable income which is not what we need here.
However, the degen strategy is now fair play!!
If you own substantial cryptocurrency, you could use that as collateral on a crypto-exchange, pay the STT, and take out a loan denominated in stablecoins or the new flavor in town - the Digital Rupee.
Now, it is a loan - and a loan cannot be an income (by most stretches of imagination)
You can now use this loan as your personal expense account while your crypto stays in place as collateral. You’re essentially not going to pay any tax - the rich don’t pay any taxes anyways.
The only downside here is if the market crashes and you get margin-called, you might get liquidated. But, if you’re fast, you can cash-out, sell BTC at a loss, which, is also not an income by any stretch of imagination, as long as your selling price is lower than your buying price.
Line 3.a: No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Further, loss from transfer of virtual digital asset cannot be set off against any other income.
This line appears to be here for the lawyers and the accountants.
Based on 10-minutes of googling, it appears (#IANAL, #NFA) that this is the same treatment that the Indian Govt metes out to ‘cash credit‘ - a fancy term for when you receive funds that you neither explain the source of nor the nature. Sounds like how you’d describe poorly laundered money.
What I’m understanding here is that your crypto trades are being separated from all your other incomes by drawing a line in the sand. If you make money/income from your crypto-holdings etc, you’re going to be taxed, dearly, with no offset available as a respite against your other incomes.
Therefore, if you are net-loss, at the end of the financial year in your non-crypto balance sheet, but green in your crypto portfolio, the income component of that shall be taxed - which appears to be the time when you, as they say, cash out!
While on one hand, it appears that freelancers who receive payment in cryptocurrencies are going to be taxed a flat 30% when you receive your salary/payment etc, on the other, if you already HODL it, you’re good to go until you cash out. It appears that you could theoretically ride the wave by HODLing for the next 5 years and cash out with one billion% profit that taxes won’t make a dent in your lifestyle.
Line 3.b: Further, in order to capture the transaction details, I also propose to provide for TDS on payment made in relation to transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold.
Indians know it as the ‘50k rule’. If you’re making an online transaction valued at or over INR 50,000, you need to furnish your PAN card details. Certain banks, such as HDFC charge a similar fee on transfers made inter-bank or intra-banks.
(Note: Not all Indian banks charge this fee but the precedence and experience already exists.)
Line 3.c: Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient.
While it might seem straightforward, it creates a few unnecessary questions when we think about NFTs. If I gift my wife an NFT and she gotta declare it as a tax item, is it really a gift?
This is basically an extension of the previous point.
Conclusion
This is a step in the right direction, towards greater acceptance and greater transparency into how residents of India use crypto. Sure, we can argue for more freedoms, lesser taxation, and treatment on par with FIAT currency (or even equities for that matter), but that can be said about any asset class. The haves want lower taxation and controls while the have-nots won’t care or want to ‘eat the rich.’
Let us not forget that the stance earlier, at least of the RBI (which is now tasked with creating the digital rupee) was to ban all cryptocurrencies in India. There is also hopium around the belief that the more decentralized cryptocurrencies such as BTC and ETH could be kept out of the ambit of ‘virtual digital assets’ but this is probably not on the cards as of now.
Yes, almost all of us who earned/traded/gambled outside of centralized exchanges (CEXs) know how to set up a metamask and basically keep their crypto as undeclared income, it is no doubt a positive sign that crypto-innovation in India can now continue unabated, with oversight, and hopefully a lot less red-tape.