Govt's cryptocurrency stance: Heads I win, tails investors lose

The government has laid out clear rules on taxation of cryptocurrencies but has not said anything on what happens in cases of fraud

The Finance Ministry’s position on cryptocurrencies has caused much gnashing of teeth over the lack of clarity. 

However, as it turns out, the Ministry seems to know exactly what it is doing and has been quite clear in its stance, namely, we will tax your gains but your losses are your own.

The latest official statement on cryptocurrencies comes in the form of a written Lok Sabha answer by Finance Minister Nirmala Sitharaman on July 18, 2022. 

“Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any legislation for regulation or for banning can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.”

In other words, there’s not going to be any regulatory legislation on cryptocurrencies, probably for decades. That’s the bad news for investors because even in the best of times major economies around the world take decades to hammer out a common approach toward regulatory or taxation issues.

Take the example of Base Erosion and Profit Shifting (BEPS). The major economies got serious about it in the aftermath of the Global Financial Crisis in 2008 but it was only about 10-12 years later that anything is being done about it.

Or take the example of systematic automatic exchange of tax-related information between nations. It was in the works as early as 1997, but it was only in 2015 that India joined the Multilateral Competent Authority Agreement (MCAA) for exchanging information. 

Many other countries took longer to join. Some still haven’t.

So if the Indian government is waiting for an “international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards,” it’s got a long wait ahead.

But what this also means is that the government has now made its stance regarding the regulation of cryptocurrencies perfectly clear. 

There are two broad aspects to regulation: taxation and fraud prevention and redressal. 

What the government has done is to make rules regarding the taxation part and has effectively washed its hands off the fraud prevention and redressal aspect.

In the last Budget, the Finance Minister said that any income earned from the transfer of virtual digital assets would be taxed at 30 per cent. Further, she said that any loss from the transfer of virtual digital assets would not be allowed to be set off against any other income. She also levied a 1 per cent TDS on the transfer of virtual digital assets. 

These are, by and large, pretty clear rules.

As for the fraud part, the government has in essence forced crypto enthusiasts to adopt the principle of caveat emptor or ‘buyer beware’. The RBI has since 2013 been periodically warning crypto investors about the dangers of investing in cryptocurrencies. 

In 2018, it even went so far as to ring-fence the entire banking industry from cryptocurrencies.

Although this decision was overturned by the Supreme Court in 2020, the RBI has not changed its stance of complete distrust of cryptocurrencies. In the Lok Sabha answer referred to above, the FM went on to say that “the RBI is of the view that cryptocurrencies should be prohibited”.

The Finance Ministry, for its part, has also been vocal with its warnings, likening cryptocurrency investments to Ponzi schemes.

After all of this, it’s not surprising that it is now leaving crypto investors to their own devices. After all, if they feel they are savvy enough to ignore the numerous warnings, they probably can handle the losses as well. 

In the meantime, the government will rake in the tax revenue. In other words, heads I win, tails you lose.