According to three persons familiar with the matter, the government plans to define cryptocurrencies in a new draught statute that also suggests compartmentalizing virtual currencies based on their use cases. Crypto will be treated as an asset/commodity for all purposes, including taxation, as well as payments, investment, and utility, according to the user’s needs.
This will be the first time cryptocurrencies are classified based on the technology they employ, but sources say the government’s focus will be on the asset’s end-use for regulatory purposes. The measure is also anticipated to spell out the tax treatment for such assets, ensuring that they are properly recorded in the books.
“The government is working on defining cryptocurrency and its treatment in various use cases in its draught bill so that it can be treated correctly in the books of accounts and taxed properly,” a source close to the situation said. “It has no intention of allowing virtual currency payments and settlements.”
There is no clear definition of whether crypto assets are a currency, a commodity, a service, or anything closer to equity, whether for tax or other reasons. This is a gap in the law because without a definition of an asset, the question of how it should be taxed or governed arises. According to sources close to the situation, the administration wants to define cryptocurrencies first.
“Crypto-assets can be classified according to the technology they employ or according to their intended use. So, before talking about how the legislation should function, the government needs to define what cryptocurrencies are, according to a source familiar with the situation. Crypto exchanges recently submitted policy recommendations for regulating cryptocurrencies, including classifying cryptocurrencies as digital assets and establishing a framework for registering indigenous exchanges, according to ET.
They urged that India recognize crypto tokens as digital assets rather than currency and that policies on exchange ownership, KYC, accounting, and reporting standards, among other things, be clarified. It is estimated that there are more than 5,000 cryptocurrencies, all regulated differently. In the view of Jaideep Reddy, head of technology law at Nishith Desai Associates, cryptocurrency regulation should be based on the end-use or activity of a specific token, rather than just the technology itself.
According to sources close to the situation, only cryptocurrencies that fall under the government’s definition would be allowed to trade in India. According to those familiar with the situation, these crypto assets will then be taxed appropriately. According to sources, the government could impose a security transaction tax (STT) on cryptocurrency trading as well.
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