Framework to regulate cryptocurrencies soon

The government has decided to close regulatory gaps to keep a check on cryptocurrencies, including bitcoin. According to sources, the government is likely to define cryptocurrencies and bring in a regulatory framework in the Union Budget 2018-19.

The sources said the government’s expert committee on cryptocurrency headed by Economic Affairs Secretary Subhash Chandra Garg had prepared a draft report. This talks about the definition of the digital currency and whether it would be classified as currency, capital assets or intangible assets. Earlier, the government had formed another panel to study the subject.

A government official privy to the development said it was essential to bring clarity on cryptocurrencies as the usage of such platforms was increasing.

The expert panel defines cryptocurrencies as a “secure” and “anonymous way” of remittance of money and entering into a transaction. It states that these currencies are as good as fiat currencies, such as legal tenders issued by the government of any country, and are acceptable as a mode of payment by some entities. According to the report, over a thousand cryptocurrencies exist.

Further, the report talks about how cryptocurrencies could be classified and what issues could emerge based on such classification, the sources said.

On classifying them as a “currency”, the report says since various entities accept bitcoin as a mode of payment, it seems that bitcoin is a currency. However, at present it has not been termed as currency under the Foreign Exchange Management Act (FEMA) or as legal tender by the Reserve Bank of India (RBI).

“Whether bitcoin would be classified as a currency or not would be a matter of dispute and argument until the RBI clears its stand on it. If the RBI declares that bitcoin is a currency, any trading in it would be subject to FEMA regulations,” it notes.

The panel says cryptocurrencies could be deemed “capital assets” if purchased for the purpose of investment by taxpayers. In that case, any gain from the transfer of bitcoins shall be taxable as capital gains. Further, it explains how to compute the capital gains from the sale of digital currencies. Like other capital assets, if bitcoins are held for more than 36 months from the date of purchase, it will be considered as long-term capital gain, otherwise short-term capital gain. It further says if profits earned from bitcoin are taxable as “business income”, then the bitcoin earned in the ‘mining’ process are also taxable as business profits.

However, if bitcoins are classified as capital assets, the virtual currency earned from bitcoin ‘mining’ may not be charged to tax. It also highlights the scenario if a cryptocurrency is considered as “intangible asset” under the I-T Act.

“Situs of the asset may vary according to its nature and obligations attached with it,” the report says. It says situs of bitcoin can be linked with the country where its operating server is located.

The issue of regulating cryptocurrencies, especially bitcoin, gained momentum when it started making new highs in the global markets. People are investing in it heavily, regardless of the fact that there are no rules and guidelines to support it. Bitcoin is currently hovering around $15,800 apiece.

Recently, a survey operation by the income-tax department at the nine major bitcoin exchanges of India showed how the platform could be misused. “Due to lack of clarity on it, the gains made by an individual through transactions in cryptocurrency cannot be taxed as the real source of the gain is unknown and mostly unregulated,” said a tax official who was the part of the survey operation.