Cryptocurrency is a type of digital or virtual money designed to work as a
medium of exchange over the internet and whose network is distributed across
many computers. It is organized and monitored by a peer-to-peer network called a
blockchain, which also serves as a secure transaction ledger, e.g., buying,
selling, and transferring.
Cryptocurrencies are decentralized digital assets, which means they are not
issued by governments or other financial institutions like physical money. They
can be launched, mined, and/or distributed by any private person.
The first and foremost known endeavour to create a cryptocurrency was eCash in
1980 by David Chaum who established a company called DigiCash that would
ultimately make eCash. But no cryptocurrency was able to influence the masses
till the release of Bitcoin in 2009.
Some cryptocurrencies that are presently in circulation are Bitcoin, Litecoin,
YEM, Ether, and Monero.
Mining is a process that is used by several cryptocurrencies including bitcoin
to generate new coins and verify new transactions. This process involves the use
of extensive, decentralized networks of computers all around the globe that
verify and safeguard blockchains, which are virtual ledgers that record crypto
Mining is performed using sophisticated hardware that solves an exceptionally
strenuous computational math problem. The very first computer which finds the
solution to the complex problem receives the next block of bitcoins and the same
process starts again.
Each computer on the network competes with others to be the first to speculate a
64-digit hexadecimal number which is known as a "hash." The faster a computer
can divulge guesses, the more likely the miner is to earn the reward. Bitcoin
miners get bitcoin as a reward for accomplishing "blocks" of verified
transactions, which are added to the blockchain.
Regulation of Cryptocurrency in India
Cryptocurrency regulations vary by jurisdictions around the world. Currently,
cryptocurrencies are not regulated in India. There are no regulations to ban
people from dealing in or mining cryptocurrency. Presently, as public cryptos
are mined using the miners' own resources, there are no laws in operation for
regulating this process.
Is Cryptocurrency legal or illegal in India?
Whether crypto is legal or legitimate in India has come up repeatedly. Neither
the government nor the central bank, the Reserve Bank of India (RBI), has
The Reserve Bank of India (RBI) issued a circular dated 6th April 2018 (1),
notifying that citizens will not be allowed to deal in cryptocurrencies as they
pose several serious concerns regarding consumer protection, money laundering,
market integrity, and many others. But in 2020, in the case of Internet and
Mobile Association of India v. Reserve Bank of India (2), Supreme Court struck
down the aforementioned circular. The Supreme Court seemed to have favoured
virtual currencies by allowing its dealings.
The supreme court observed that cryptocurrency should be regulated by the RBI.
The Supreme Court held that since RBI is a financial institution whose aim is to
protect public money, it was within RBI's right to ban cryptocurrency. But at
the same time SC also said that in place of banning these virtual currencies
altogether, the RBI could have looked for alternatives that may have been
advantageous to the virtual currency users by implementing apposite rules.
After the Internet and Mobile Association of India Judgment (Supra), the
government was planning to introduce "The Cryptocurrency and Regulation of
Official Digital Currency Bill, 2021" (the "Bill") to the Lok Sabha. According
to the Lok Sabha bulletin dated November 23, 2021 (3), the Bill seeks 'to create
a facilitative framework for creation of the official digital currency to be
issued by the Reserve Bank of India.
The Bill also seeks to prohibit all private cryptocurrencies in India; however,
it allows for certain exceptions to promote the underlying technology of
cryptocurrency and its uses.' But owing to several complexities, the bill has
not been introduced in any house of Parliament.
But India is trying to regulate the cryptocurrency market to make it less
volatile and risky for the citizens. MCA amended Schedule III of the Companies
Act 2013 which states that from Financial Year 2021-22 all the companies will be
required to disclose their investments in cryptocurrencies, and also state any
profit or loss involved in the transaction. The holder of virtual currencies
will also be required to state the number of holdings, details of deposits, and
advances from any person for trading.
While cryptocurrencies are not legal tender in India, the Government of India
has noted time and again that they are also not illegal. Hence, cryptocurrency
is currently a gray area in India.
Taxation Policy on Cryptocurrency in India
The Union Finance Minister Nirmala Sitharaman through Finance Bill, 2022 has
proposed to levy a flat tax of 30 percent on the transfer of virtual assets
including NFTs and cryptocurrencies. For this purpose, a new Section 115BBH to
the Income-tax Act,1961 will be inserted.
Further, while ascertaining the income from the transfer of virtual assets,
there is no provision for any deduction in respect of expenditure except the
cost of acquisition. In addition to this, as per proposed provisions of Section
115BBH, the loss from the transfer of virtual assets will not be allowed to be
set off against the income generated from the transfer of another virtual asset.
This newly proposed virtual asset tax will be applicable from the Assessment
Year 2023-24. That means all the income arising from crypto or NFT transactions
in Financial Year 2022-23 will be taxed at the rate of 30 percent.