New crypto tax law discriminatory in treating different assets differently

Since 1956, all Indian governments have thought that economic discrimination is fine, but political or social discrimination is not

After a great deal of deliberation, the government told Parliament last week that investors would not be able to set off a loss made while trading in one currency against a gain made in another. Thus, what you lose on the races can’t be used to reduce your tax liability on what you gained at the roundabouts.

The change has been incorporated in the Finance Act. The idea is to discourage people from betting on cryptos.

But it’s an unfair decision because it’s discriminatory; this rule doesn’t apply to other assets. It is no excuse to say that uniform treatment is not a requirement of tax policy. After all, different assets have been taxed differently for several decades.

In their favour, however, it must be said that the government and the Reserve Bank of India (RBI) have been consistent in their stance on cryptocurrencies. These, they think, are risky and that the public should be protected from downside risks. A fool and his money can’t be soon parted, they think.

And that’s why this whole affair has confusion written large. Starting in 2013, the RBI has issued at least three strongly-worded warnings to the public about the risks of cryptocurrencies.

These risks included hacking, loss of passwords, compromise of access credentials, malware attack, loss of e-wallets, as well as there being no legal recourse in the event of losses, frauds, or disputes.

Apart from that, the RBI governor and deputy governors have given numerous speeches outlining why cryptocurrencies should be banned.

In December 2017 the finance ministry had issued a statement on cryptocurrencies, informing users that there was a “real and heightened risk of investment bubble of the type seen in ponzi schemes”, which could result in sudden and prolonged crashes, leading to retail investors losing their hard-earned money.

None of it seemed to work, apparently because the RBI on April 6, 2018, took the next step and issued the country’s first (and the only at the time) binding regulation on cryptocurrencies, which basically banned all banks and NBFCs from doing any business in cryptocurrencies or with those engaged in such businesses.

Indians could no longer use the rupee to buy or sell cryptocurrencies, and could not use bank accounts to link to their cryptocurrency accounts. This was, in effect, a ban on cryptocurrencies in India.

But this was overturned by the Supreme Court in 2020.

Over time, however, the government has realised and embraced the fact that there is a difference between cryptocurrencies and blockchain. While the former is to be viewed as being risky, the latter is a software structure that is to be encouraged as it enhances security.

Undaunted, its latest attempt at discouraging the use of cryptocurrencies is to tax cryptocurrency profits at 30 per cent and implement a 1 per cent TDS on crypto transactions.

While profits in crypto transactions cannot be set off against losses, the 1 per cent TDS can be adjusted against the overall tax payable.

The tax is meant to ensure that only those who can afford to lose money in cryptocurrencies dare to invest in them, and the TDS, as the finance minister recently said in Parliament, is simply a means of tracking transactions.

Until there is a proper crypto law, these ad hoc measures are all that are possible.

It’s nice that we have such a caring government. But the fact remains: the new law is discriminatory because it treats different assets differently. If challenged, I think the courts will strike down the rule.

The crypto policy underlines another tendency of all Indian governments. Since 1956, they have thought that economic discrimination is fine but political or social discrimination is not. The courts have generally gone along with this.

That’s how strange a country we live in.