Taxation does not spell legitimacy for crypto

Hold those party plans. Nothing in the budget announcements gives any cause for celebration by crypto investors. Any such assumption that the budget announcements makes cryptocurrencies “legal” is grossly misconceived. Neither does the issuance of a Central Bank Digital Currency (CBDC) by the Reserve Bank of India (RBI) nor the taxation of income from cryptocurrency transactions legitimises or lends legality to either cryptocurrencies or to cryptocurrency transactions. That also does not mean that it holds cryptocurrencies to be illegal. The position before the budget announcements remains the same -- India is ambiguous qua cryptocurrencies. Any certainty on legality can and will come only when the proposed law is enacted.

CBDC is a government-issued cryptocurrency backed by the central bank. Its value is likely to be pegged to that of the Indian rupee. It may at best be a digitised form of currency or a crypto asset, with the latter requiring clarity on its contours. That clarity would come with the proposed launch. The announcement of India’s proposed CBDC is also not new. It is just done more emphatically with a tentative deadline. That is all.

There is also no parity between CBDCs and privately issued cryptocurrencies, and there is no ground whatsoever to believe that the announcement of India’s CBDC in any manner lends to the presumption that India’s proposed legislation will legitimise privately issued cryptocurrencies.

Similarly, it is nothing but building castles in the air to believe that taxation lends legitimacy to a business. It does not -and that’s the emphatic and explicit position in law. The Supreme Court of India and multiple high courts have clarified and reiterated this position – that income is taxable irrespective of how such income was earned. Hence even where a business is illegal, and even if a prosecution is being launched against such business, the income from such illegal business can be taxed. Merely because the income is taxed or that the assessee has paid tax on the income does not lend any legality or legitimacy to the business. The consequences for running an illegal business will still accrue to support prosecution of the assessee. In the case of CIT v Piara Singh (1980), the business in question was smuggling, and the Supreme Court clarified that the illegality of such business does not take the income from smuggling out of taxation statutes. The assessee was taxed for income from smuggling and was also held to be entitled to claim deductions for loss. This is all the benefit that the assessee gets from being taxed.

The cause for concern from any mistaken assumptions that taxation has now ensured legality for cryptocurrency transactions is twofold. First, cryptocurrency marketplaces have been susceptible to speculative volatility even from general tweets and often every development with respect to this domain has been misinterpreted or misrepresented with each such action causing more volatility, affecting investor rights.

Second, if the crypto investors mistakenly believe that taxation makes cryptocurrencies legal in India, chances are the millions of investors and each of their investments will increase without cause. That there will be misconceived or even misleading statements to encourage such speculative investments cannot be ruled out, as was done after the Supreme Court of India struck down two RBI circulars. Speculation ran rife then that Supreme Court had now legitimised cryptocurrencies or lifted a “ban” on cryptocurrencies in India. This was not so as there was no ban prior to the Supreme Court’s decision, and none thereafter. The only purpose of the RBI circulars, which the Supreme Court struck down, were to stop banks and payment systems being utilised for cryptocurrency transactions.

Expeditious clarity from the government therefore on this aspect — that nothing changes on India’s position, which in any event still remains ambiguous, with respect to cryptocurrencies irrespective of issuance of CBDCs or taxation — is imperative. It is equally or more urgent now for the government to expedite its cryptocurrency legislation. The exposure by Indian investors into crypto assets is already large, and continued silence in this regard merely worsens the situation for all — the government, industry, and most importantly the investors.