India’s cryptocurrency industry has been seeking regulatory clarity for more than a year. It has been particularly desperate about tax laws after several exchanges were recently probed by authorities for alleged tax evasion.

This makes the upcoming Budget session of Parliament important.

Coindesk reported in December 2021 that the Centre was unlikely to introduce the much-awaited cryptocurrency bill this session which ends on April 8. The upcoming state polls, the need for wider consultations with global international stakeholders, and differences between the Reserve Bank of India and the government, among others, are possible reasons for this delay.

“While the legal implementation still seems a while away, any initiative announced in the Budget would at least open a direct line of conversation on crypto classification as an asset class, its taxation policies and the blue-ocean opportunities available in this globally emerging segment,” said Nischal Shetty, CEO and co-founder of WazirX, a major cryptocurrency trading platform.

Some analysts said that even if the government does not bar Indians outright from dealing in cryptocurrencies, it could at least use a regressive tax regime to curb the sector.

Tax on crypto

It depends on the classification of holdings as capital assets or a commodity.

India is likely to classify cryptocurrency as an asset class, levying short-term capital gains tax if the holding period is less than three years. Else, it will be treated as long-term investments with a 20% tax with indexation benefit, meaning purchase price adjusted for inflation index.

Speculation is rife that the government may consider deducting/collecting tax at source on cryptocurrencies transactions valued above a limit.

Further, a higher tax rate of 30% may be levied on sale, as is in the case of winning a lottery, according to Arjun Khazanchi, co-founder of Rooba Finance, a decentralised lending platform.

“The industry sees crypto being formally brought into the tax code…there could be a proposal to not allow losses from the sale of cryptocurrency to be offset or carried forward,” Khazanchi said. “This is to prevent tax-loss harvesting.”

Sticking points

The government is keen on regulation, but it wants to hold more discussions and build a consensus, given the rapidly evolving technology involved.

At the virtual summit of the World Economic Forum on January 17, Prime Minister Narendra Modi called for synchronised global action to regulate cryptocurrencies, emphasising that efforts by any one country may not be sufficient.

A legislative framework for virtual currencies will also require the amendment of some existing laws like the Income Tax Act, besides foreign asset disclosure norms.

This is not all. The Reserve Bank of India has expressed concerns over macroeconomic stability and is in favour of banning “private cryptocurrencies”. In that case, it will be difficult for authorities to bridge the gaps in the existing draft Bill.

Reports suggest that the government wants to wait for the RBI to run a pilot test of its digital currency before tabling the legislation, as it might want to work on the technical aspects of the digital token as well.

This article first appeared on Quartz.