The crypto boss should have seen the government’s response coming

In response to a question raised in the Lok Sabha, the government said that approx. 96 crore recovered from 11 crypto exchanges for goods and services tax evasion. Furthermore, in the Union Budget, the government had proposed a 30% tax on any capital gains arising from the sale of crypto. In response to another question raised in Parliament, the government stated that while computing capital gains, no expense was allowed to be deducted other than the cost of crypto acquisition.

The Center also stated that the cost of crypto mining will not be treated as cost of acquisition, and hence was not allowable as a deduction while computing capital gains on which income tax should be paid. Furthermore, while computing the overall capital gain, any loss incurred while trading crypto cannot be set off against the profit in the process.

Of course, this seems quite unfair in comparison to how income tax is calculated on other forms of investment income. Typically, losses incurred while selling stocks or mutual funds can be set off against capital gains made, thus reducing the tax liability.

Also, capital gains are classified as long-term or short-term, depending on how long the investment is held. Income tax rates are lower on long-term capital gains. Also, in the case of investments such as gold, debt mutual funds and real estate, investors can use the benefit of indexation by taking inflation into account while calculating the cost of acquisition of the asset. This helps in reporting lower long-term capital gains in absolute terms and thus pays less tax.

Neither of these advantages are available in the case of crypto. The reason for this is simple. No government likes any competition in the field of money, a fact that crypto owners will not bother to study the history of money, and not only in the shortest possible time. Got caught to get it.

Historically, coin money was one of the first forms of money that became popular among the people. In fact, by the sixth century BCE, many Greek city-states were producing their own coins. As David Aurel writes in Money, Magic and How to Dismantle a Financial Bomb: “Since then, power over the supply of money, and the right to determine what is legal tender, have been defining characteristics of the state.”

Interestingly, Coin-money found its killer-app, and that was the war. As Aurel writes: “Coins served as a tool for payment, but also as a tool both to motivate soldiers and to control the general public. Soldiers and mercenaries used metal. paid for by using what was mined or plundered; they spent the money on things like food and supplies; and the state then asked for some of the penny coins back as taxes.” The general public has to hold the specified currency to be able to pay taxes. To get the money needed for this, they had to either feed the soldiers or house them. This, in turn, solved the logistical problem of maintaining an army. Even now, there are three things that make a government a government. The right to decide what money is, the right to impose taxes, and the right to wage war.

In this sense, no government is likely to sit around doing nothing when its monopoly in any of these three areas is being challenged. Cryptos did just that by challenging the government’s monopoly on deciding what is money and what is not.

Therefore, at some point the government’s backlash against cryptocurrency was inevitable. However, as the good times were going on, the crypto bosses could not see it coming. Or they probably hoped to attain a certain size before the government could act, thus forcing it to lay its hands on the issue. If the solution to a problem was just about throwing money at it, governments would solve almost every problem in the world, given that no one has access to more money than the government. It can simply make it out of thin air.

To conclude, while clarity now exists as to how much income tax will have to be paid on capital gains made on crypto, India’s regulation of the Cryptocurrency and Official Digital Currency Bill is still in the works. So, beyond taxation, crypto exchanges still don’t fully know what the government has in store for them. Is crypto, for example, legal or not?

RBI is clearly against crypto. As Deputy Governor T. Rabi Shankar said in a recent speech: “Cryptocurrency should not be banned because the ban is unlikely to be effective is a superficial argument. One could also argue that drug trafficking despite the ban remains a widespread phenomenon, and therefore drug trafficking must be legalized and regulated.”

Shankar further added: “If crypto-currencies are banned, most of the law abiding investors will stay away from investing. Those few elements who will continue to invest [in cryptos] will inevitably carry out an illegal activity.”

Vivek Kaul is the author of ‘Bad Money’.