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Striking Gold in the Digital Mine: Can Classification of Cryptocurrency as "Digital Gold" Solve India’s Cryptocurrency Conundrum?

Article

Praneel Panchagavi

(4th Year Student, Symbiosis Law School)


The U.S. Department of Treasury’s recognition of Bitcoin as “digital gold” on December 8, 2024 has intensified global discourse surrounding cryptocurrency (Crypto). There are many parallels between Bitcoin and gold such as hedges against inflation, stores of value, and tools for portfolio diversification. Bitcoin’s transformation from a niche asset to a financial mainstay has been marked by its tremendous growth in market capitalization. It recently reached a staggering $100,000 in value, exemplifying its burgeoning acceptance as a mainstream financial asset, despite certain risks associated with it such as high volatility and potential misuse for illicit activities. In the investment realm, BlackRock’s Bitcoin ETF has surpassed its gold ETF in assets under management, hinting at a shift in investor preference. Moreover, Elon Musk’s suggestion of a U.S. Bitcoin strategic reserve reflects a broader sentiment that Bitcoin could serve as a hedge, like national gold reserves.


Subsequent to this recognition, the Income Tax Appellate Tribunal (ITAT) in India, gave a landmark judgment in Raunaq Prakash Jain v. I.T.O, recognizing its treatment as a capital asset for transactions prior to the introduction of Virtual Digital Assets (VDAs) regime through the Finance Act, 2022. This meant that the gains from sale of crypto would be taxed as capital gains. Though both digital gold and crypto are legal in India, they remain unregulated and taxed differently. Thus, it raises a pivotal question of whether India should classify crypto as digital gold for regulatory and taxation purposes. This article examines characteristics of both assets, their taxation policies, and regulatory challenges. It also evaluates whether such a classification can harmonize India’s fiscal and regulatory framework around crypto, aligning it with the global practices.  


ITAT’s Ruling: Paving the Path Towards Classification of Crypto as Digital Gold in India


The ITAT in the case of Raunaq Prakash Jain passed a landmark judgment on December 17, 2024 providing clarity on tax treatment of crypto in India. It recognized crypto as capital assets, impacting the way gains from sales of such assets are taxed, especially for transactions prior to introduction of specific regulations for VDAs under the Finance Act, 2022. Thus, as per the ruling, profits from sale of crypto will be treated as capital gains rather than income from other sources. This clarity provides investors some relief as their profits will be subject to capital gains tax rather than higher income tax slab rates. However, this is applicable only to sales made before introduction of VDAs.


The judgment’s expansive interpretation of the term “property” under section 2(14)(a) of the Income Tax Act, 1961 (IT Act) paved the path for the classification of crypto as a capital asset. The section broadly defines “capital asset” as “property of any kind held by an assessee, whether or not connected with his business or profession.” The Tribunal focused on the inclusive nature of the term “property,” which encompasses all rights, claims, and interests that an individual may hold. Crypto represent a distinct form of property as they are based on ownership rights recorded on a blockchain. These rights can be transferred, traded, or converted into fiat currency, thereby exhibiting characteristics of traditional capital assets like shares, real estate, etc. The Tribunal’s key observation was that the ownership of crypto need not involve physical possession or a tangible form. It will be sufficient if the assessee has a claim or right over the crypto.


Evaluating the Viability of Classifying Crypto as Digital Gold in India through the Lens of Taxation and Regulatory Implications


With the U.S. Department of Treasury recognizing crypto as digital gold and subsequently the ITAT recognizing crypto as a capital asset, it is imperative to examine the nexus between the two as currently both crypto and digital gold fall under the category of capital asset. Both crypto and digital gold are currently legal in India but lack sufficient regulation. However, the former is currently taxed higher than the latter for transactions post 2022. Since both assets will eventually be regulated and are currently categorized under the same category, it will be beneficial to maintain the classification of crypto as a capital asset even for transactions post 2022, by taking measures akin to the U.S. This will ease the regulatory burden on the government and tax burden on the individuals. To examine whether classifying crypto as digital gold in India will be viable, their inherent characteristics, taxation, and potential risks must be evaluated.


Crypto, akin to digital gold, is intangible, held electronically, and often used as a means of diversification of investment. While the ownership of digital gold is recorded electronically through repositories, crypto’s ownership is recorded and stored via blockchain technology in a decentralized ledger. As pointed out by the Federal Reserve Chair of the U.S., Jerome Powell, they are not used as a form of payment, or a store of value, and are volatile. Both the assets are usually held for long-term appreciation, making them analogous to traditional investments like physical gold. These are perceived as a hedge against inflation and a means to diversify portfolios. The taxation of both assets currently differs. The gains from the sale of digital gold are treated as capital gains under the IT Act , with applicable short-term or long-term tax implications based on the holding period. However, crypto is considered and taxed as VDA for transactions post 2022 and it is considered as a capital asset for transactions pre 2022 taxed akin to digital gold.


There are various distinctions and risks associated with these assets as well. Digital gold is backed by tangible underlying asset, physical gold, whereas crypto derives value from its utility, scarcity and decentralized technology. Despite this difference, the overarching principles governing their taxation and classification as capital assets remain consistent.


Analyzing Tax Implications for Crypto as a Capital Asset


Before April 1, 2022, there was no clear taxation framework for crypto in India. The Raunaq Prakash Jain judgment provided much-needed clarity by treating crypto as capital assets, subject to capital gains tax. The Tribunal’s interpretation allowed taxpayers to benefit from exemptions under section 54F of the IT Act. With the introduction of a specific tax framework for VDAs under the Finance Act, 2022, the treatment of crypto underwent significant changes. The gains from crypto transactions are taxed at a flat rate of 30%, irrespective of the holding period or the nature of the transaction. Further, no deductions, except for the cost of acquisition, are allowed. While digital gold continues to have indexation and long-term holding benefits, crypto is now subjected to a more rigid and disincentivizing tax structure. This ruling paves the way for future crypto taxation reforms, which can consolidate the current duality in taxation, providing a distinction between long-term and short-term gains from crypto.


Assessing Potential Benefits and Associated Risks in the Classification


Alignment with Global Practices as Means of Attracting Foreign Institutional Investments (FIIs)


The global approach towards regulation of crypto sets a benchmark for India. Advanced economies like the U.S., Canada and Australia treat them as capital assets, giving benefits to long-term investors. By aligning its regulatory framework with such practices, India can improve investors’ confidence and attract foreign institutional investments into its growing digital asset market. Classification of crypto as digital gold, with taxation akin to other capital assets can make India a crypto-friendly jurisdiction while still maintaining tax oversight. This will also facilitate international collaborations and compliances with frameworks like the Financial Action Task Force guidelines on anti-money laundering and combating the financing of terrorism.


Investor Protection and Market Stability


Investor protection is the bedrock of any financial regulatory regime. The gold market in India is regulated by the Securities and Exchange Board of India and the Bureau of Indian Standards, which ensure transparency, traceability, and fair-trade practices. If similar measures are taken for crypto by classifying it as digital gold, it will likely provide assurance to retail and institutional investors.


Crypto often suffers from volatility and lack of regulatory oversight due to its treatment as VDA. The government can bring some stability in the trading patterns by promoting crypto as a long-term investment asset. Moreover, distinguishing capital gains from speculative trading profits would deter risky, short-term trading behavior, thereby reducing the likelihood of market manipulation.


Revenue Implications for the Government


While the current treatment of crypto as VDA ensures high tax revenue for the government, it often exacerbates the risk of tax evasion due to underreporting and shifting of crypto transactions into the gray market. A bifurcated structure for crypto as capital gains can strike a balance between revenue generation for the government and compliance incentives for the investors. Furthermore, ensuring regulation over crypto, the government can explore additional sources of revenue, such as taxation of decentralized finance (DeFi) transactions and income from staking, lending, and yield farming, which are gaining popularity among Indian investors.


Volatility Concerns


One of the primary criticisms of crypto is its extreme price volatility, which undermines its utility as a reliable store of value. Unlike gold, whose value is based on physical scarcity, cryptocurrencies face speculative pressures due to multiple factors such as market sentiment. For instance, Bitcoin’s price surged to over $100,000 following speculative hype in the first week of January, 2025 but fell by 10% in the next week. However, growing institutional adoption may temper this volatility over time. Bitcoin’s limited supply of 21 million coins mirrors gold’s scarcity, while blockchain’s transparency can reduce market manipulation.


Tax Evasion Risks


The decentralized nature of crypto poses complex challenges for tax enforcement. The transactions taking place on decentralized exchanges or through peer-to-peer platforms are difficult to track, increasing the risk of tax evasion. Despite blockchain’s inherent transparency, users can leverage privacy coins and mixers to obfuscate their transaction histories. To address this, the government can consider integrating blockchain analytics tools to monitor transactions and enforce compliance. Further, international collaborations, such as participation in the Organization for Economic Co-operation and Development’s Crypto-Asset Reporting Framework, would bolster the enforcement mechanism.


Conclusion


The recognition of crypto as digital gold signals a transformative shift in the financial and regulatory aspect of crypto. The U.S. Treasury’s acknowledgment and India’s judicial ruling highlight their growing significance as capital assets. Aligning crypto taxation with that of digital gold can foster confidence in investors, promote regulatory clarity, and reduce risks of tax evasion, while ensuring economic benefits for the government. However, addressing inherent challenges such as volatility and illicit use also become imperative. A balanced regulatory approach, inspired by global best practices, can aid India in the becoming a leader in digital asset market, fostering innovation and economic growth.

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© 2024 by Indian Economic Law Review.

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