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Crypto bosses should have seen a government backlash coming

A reading of history would’ve made it clear that every state guards its right to dictate what money is

Photo: iStockPremium
Photo: iStock

The Indian Premier League T20 cricket tournament is currently on. And unlike last year’s edition, there are barely any advertisements by crypto platforms or exchanges. An explanation perhaps lies in the fact that the managers of these exchanges are finally taking government risk into account, something they had ignored earlier.

In an answer to a question raised in the Lok Sabha, the government said that around 96 crore was recovered from 11 crypto exchanges for evasion of goods and services tax. Further, in the Union budget, the government had proposed taxing any capital gains arising from the sale of cryptos at 30%. In response to another question raised in Parliament, the government stated that while calculating capital gains, no deduction of any expenditure other than the cost of crypto acquisition was allowed.

The Centre also said that the cost of crypto mining will not be treated as cost of acquisition, and hence wasn’t allowable as a deduction when calculating the capital gains on which income tax must be paid. Also, while calculating overall capital gains, any losses incurred while trading crypto cannot be set off against gains incurred in the process.

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

Further, capital gains get categorized as long-term or short-term, depending on how long the investment is held on to. Income tax rates on long-term capital gains tend to be lower. Also, in case of investments like gold, debt mutual funds and real estate, investors can use the benefit of indexation, taking inflation into account while calculating the cost of an asset’s acquisition. This helps report lower long-term capital gains in absolute terms and thus pay a lower tax.

None of these benefits is available in the case of cryptos. The reason for this is straightforward. No government likes any competition in the domain of money, a fact that crypto bosses would not have missed had they bothered to study the history of money, and not just got caught up with getting as many investors as possible in the shortest span of time.

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

Interestingly, coin-money found its killer-app, and that was war. As Orrell writes: “Coins served as a device for payment, but also as a tool to both motivate troops and control the general public. Soldiers and mercenaries were paid using metal that was mined or plundered; they spent the money on things like food and supplies; and the state then demanded some of the money coins back as taxes." This basically ensured that the general public had to get hold of the specified currency to be able to pay taxes. In order to acquire 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 dictate what is money, the right to impose taxes, and the right to wage war.

In that sense, any government is unlikely 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’s money and what’s not.

Hence, a government backlash against cryptocurrencies was inevitable at some point of time. Nonetheless, as good times were on, crypto bosses couldn’t see this coming. Or they possibly hoped to achieve a certain size before the government acted, thus forcing its hand on the issue. If solving a problem was only about throwing money at it, then governments would have solved almost every problem in the world, given that nobody has access to more money than a government. It can simply create it out of thin air.

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

The Reserve Bank of India is clearly against cryptos. As deputy governor T. Rabi Sankar said in a recent speech: “That cryptocurrencies should not be banned because a ban is unlikely to be effective is a superficial argument. One might as well argue that drug trafficking is a rampant phenomenon despite a ban, and therefore drug trafficking should be legalised and regulated."

Shankar went on to say: “If crypto- currencies are banned, the vast majority of investors who are law abiding would desist from investing. Those few elements who would continue to invest [in cryptos] will essentially be carrying out an illegal activity."

Vivek Kaul is the author of ‘Bad Money’.

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Updated: 06 Apr 2022, 01:37 AM IST
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