Don’t yet cash in on crypto craze – Here is the reason

Published: February 23, 2018 5:33:24 AM

Cryptocurrencies have been receiving a lot of interest from investors due to potential gains arising from significant upward movement in valuation.

Cryptocurrencies, Arun Jaitley, india, Union Budget FY19, digital gold, Sweden, US, central government, finance minister, cryptocurrencies a legal tenderRBI has consistently issued cautions to cryptocurrency investors. (Reuters)

Daksha Baxi, Ankit Namdeo & Raghav Bajaj

Cryptocurrencies have been receiving a lot of interest from investors due to potential gains arising from significant upward movement in valuation. Consequently, expectations were rife that Union Budget FY19 will address the issue of taxability of cryptocurrencies. But finance minister Arun Jaitley stated that India does not consider cryptocurrencies a legal tender or coin, and will take measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payments system. RBI has consistently issued cautions to cryptocurrency investors. Known by various names—like decentralised digital currency or virtual currency—and regarded as ‘digital gold’, the greater acceptance of cryptocurrencies was becoming a formidable risk to the traditional banking system.

The biggest issue around cryptocurrencies is that their creation, trading or usage for payment is not authorised by any central bank or monetary authority. In the past, RBI has said that no regulatory approvals, registration or authorisation are stated to have been obtained by the entities concerned for carrying on activities in such currencies, and, as a result, their users are prone to several risks and losses. For instance, since the e-wallets with such currencies are not created by or traded through any authorised agency, the loss of the e-wallet (due to hacking, malware attack, etc) could result in the permanent loss of the currencies held in them. Since payments by such currencies take place on a peer-to-peer basis without regulation from an authorised central agency, there is no established framework for addressing customer problems or disputes or charge-backs. However, as there is no underlying asset for such currencies, their value seems to be a matter of speculation, which results in huge volatility and exposes users to consequent potential losses.

From a policy perspective, since legal status of exchange platforms on which such currencies are traded in several jurisdictions is unclear, their traders are exposed to risks. In the UK, the government has still not regulated cryptocurrencies. In the US, the regulatory authorities have taken action against several cryptocurrencies, treating them as an attempt to sell unregistered securities.

The opaque peer-to-peer system forming foundation of such non-fiat cryptocurrencies results in absence of information about counter-parties and could, therefore, subject the users to unintentional breaches of laws against money laundering and financing of terrorism. However, one must acknowledge that this currency has gained wide acceptance due to ease of use. Resultantly, the government may have to rethink its policy and take a conscious call whether it wants to continue disregarding this currency as legal tender or create a regulatory regime accepting it.

The latter would, undoubtedly, mark a huge shift in the government policy. It could also require some constitutional amendments as currency, coinage and legal tender falls within the exclusive domain of the central government. Any such decision would require detailed deliberations and discussions with all the stakeholders and regulators. In this respect, Sweden could be the role model, as it is predicted to become the first country with its own cryptocurrency.

As of now, the verdict is out—the government does not consider cryptocurrencies as legal tender or coin and will take all measures to eliminate their use in financing illegitimate activities or as part of the payments system. Hence, any person who trades in such currencies or uses it for payment would do so at his/her own risk.

However, as people continue to hold and trade in them, the issue of their treatment for tax purposes remains pending. The fact that cryptocurrencies are not a legal tender results in them not being accepted as financial asset and any contract in relation to these would be speculative transaction, to be taxed as income from speculative business. In this respect, even if the government were to announce cryptocurrency to be illegal (which it has not), tax department would still levy tax if there is income to the trader or person holding cryptocurrencies.

Daksha Baxi is executive director, Ankit Namdeo is associate and Raghav Bajaj is senior associate, Khaitan & Co, Mumbai

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