Indian Laws on Crypto Assets
An overview of the Indian Laws on Crypto Assets
Introduction
Some of the Indian Laws relevant to Crypto Assets are:
Also relevant is the Supreme Court of India's judgment in Internet and Mobile Association of India versus Reserve Bank of India.
Before we start with the laws, its essential to understand that there are 11 types of Crypto Assets:
Ready money cryptos
Open Blockchain Tokens
Hush / privacy coins
Application cryptos
Security cryptos
Non-Fungible Tokens (NFT)
Algorithmic stablecoins
Governance cryptos
Public Blockchain natives
Asset-backed cryptos / Wrapped Assets e.g. tokens backed by fiat currencies, precious metals, agricultural commodities, intellectual property, and equity shares.
Lending / Borrowing cryptos
Ready money
Ready money cryptos are those that can be used to buy and sell stuff or can be quickly converted to “cash”. Examples: Bitcoin (BTC), Bitcoin Cash (BCH), Litecoin (LTC), and fiat-pegged stablecoins such as Tether (USDT).
Open Blockchain Tokens
An Open Blockchain Token (OBT) is a unique form of crypto recognized under the laws of Wyoming, US. An OBT must be exchangeable for specified consumptive purposes or services e.g. software, content, or real / tangible personal property. Example: Wrapped Asset Token (WRAP)
Hush coins
Did you know that Bitcoin isn’t 100% anonymous? All its transactions are recorded on its publicly available Blockchain. That’s what led to the birth of hush coins or privacy coins - some of which are private by default, while others let the users decide if they want to activate the functionality or not. Example: Monero (XMR)
Application coins
Application coins are those which are part of a specific use case. Example: Filecoin (FIL) is the native crypto of the Filecoin network. It can be used to pay miners to store/distribute data and retrieve information. Storage providers guarantee a minimum service level by providing FIL as collateral.
Security tokens
Security tokens are like equity shares and represent ownership of a company. Example: Exodus
Non-Fungible Tokens (NFTs)
Non-Fungible Tokens (NFT) are the crypto versions of things like art and real estate. They are used as digital proof of ownership of the underlying asset. Example: CryptoKitties.
NFTs are digital proof-of-ownership of an underlying asset such as:
digital art
collectibles (trading cards, sneakers, etc)
domain names
virtual game items (avatars, skins, weapons, etc)
physical assets
Algorithmic stablecoins
Algorithmic stablecoins are cryptos whose price stability is maintained by an algorithm. They are different from fiat-pegged stablecoins whose stability is maintained by the fiat currency they are pegged to. Example: Frax (FRAX)
Governance tokens
Governance tokens give holders a vote in a project’s development. Example: Uniswap (UNI)
Public Blockchain natives
Using a public blockchain involves the payment of gas fees or transaction fees. This fee is payable in the native Crypto of that blockchain. Example: Ether (ETH)
Asset-backed tokens
An asset-backed token or a Wrapped Asset is a blockchain token pegged to or collateralized by an asset such as art, gold, fiat currency, debt instrument, equity shares, trade invoices, real estate, etc. It’s called a “wrapped” asset or token because the original asset is put in a “wrapper” or “digital vault” that enables the wrapped version to be traded on a blockchain. Example: Coffee coin
Lending / Borrowing cryptos
These tokens make it easy for investors to borrow and lend funds in a Decentralised Finance market. Example: Aave (AAVE)
1. Income-tax Act, 1961
Virtual Digital Assets (VDAs) are defined under section 2(47A) of the Income-tax Act.
Section 2(47A) of the Income-tax Act
[(47A) "virtual digital asset" means—
(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
(b) a non-fungible token or any other token of similar nature, by whatever name called;
(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify:
Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.
Explanation.—For the purposes of this clause,—
(a) "non-fungible token" means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
(b) the expressions "currency", "foreign currency" and "Indian currency" shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);]
Section 2 (clauses (h), (m), and (q) of the Foreign Exchange Management Act
(h) currency includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank;
(m) foreign currency means any currency other than Indian currency;
(q) Indian currency means currency which is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934 (2 of 1934);
The following crypto assets come under the definition of VDAs:
Ready money cryptos
Open Blockchain Tokens
Hush / privacy coins
Application cryptos
Security cryptos
Non-Fungible Tokens (NFT) not backed by tangible assets
Algorithmic stablecoins
Governance cryptos
Public Blockchain natives
Lending / Borrowing cryptos
Some laws that apply to VDAs are:
VDAs come under the definition of "property" under section 56 of the Income-tax Act which relates to "Income from other sources".
Many transactions in VDAs incur 1% TDS under section 194S of the Income-tax Act titled "Payment on transfer of virtual digital asset". The Government has issued guidelines explaining when TDS applies and when it does not.
The Government has also issued an order in relation to TDS for transactions other than those taking place on or through an Exchange.
The Government has also issued a Circular providing some exemptions for the application of section 206AB to TDS on VDA. Section 206AB is titled "Special provision for deduction of tax at source for non-filers of income-tax return".
Income from VDAs is taxed at 30% under section 115BBH of the Income-tax Act titled "Tax on income from virtual digital assets".
What are not VDAs?
The Government has issued a notification specifying the following are not considered VDAs:
Gift cards or vouchers
Mileage points
Reward points or loyalty card
Subscription to websites or platforms or application
NFTs backed by tangible assets
The Government has issued a notification specifying that an NFT will not be considered a VDA if it satisfies 2 conditions:
The transfer of the NFT results in the transfer of ownership of an underlying tangible asset.
The transfer of ownership of such underlying tangible assets is legally enforceable.
2. Prevention of Money-Laundering Act, 2002
Using Crypto Assets to convert black money into white money is punishable with jail of up to 7 years & fine under this Act.
The Act and its relevant rules, regulations, etc. are available here: https://www.indiacode.nic.in/handle/123456789/2036
3. Indian Penal Code, 1860
Various crypto-related crimes such as theft, extortion, cheating & fraud are punishable by imprisonment & fines under the Indian Penal Code.
The Code is available here: https://www.indiacode.nic.in/handle/123456789/2263
4. Information Technology Act, 2000
Various crypto-related crimes such as hacking, impersonation, identity theft, etc. are punishable with imprisonment & fines under the Information Technology Act.
The Act and its relevant rules, regulations, etc. are available here: https://www.indiacode.nic.in/handle/123456789/1999
5. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 penalizes black money stashed abroad.
Undisclosed assets held abroad by an Indian resident are subject to 30% tax and a penalty of 90%. The Act also provides for rigorous imprisonment of 3 to 10 years for wilful attempts to evade tax in relation to undisclosed foreign incomes or assets.
Using black money to trade cryptos on foreign crypto exchanges could land you in serious trouble under this Act.
The Act and its relevant rules, regulations, etc. are available here: https://www.indiacode.nic.in/handle/123456789/2147
6. Securities Contracts (Regulation) Act, 1956
This Act defines and regulates securities and decides whether a Crypto Asset is a security.
The Act and its relevant rules, regulations, etc. are available here: https://www.indiacode.nic.in/handle/123456789/1644
7. Prohibition of Benami Property Transactions Act, 1988
Trading in Crypto Assets under a fake name is punishable with imprisonment of up to 7 years & fines under this Act.
The Act is available here: https://www.indiacode.nic.in/handle/123456789/1840