Is higher taxation a solution for the risks involved in cryptocurrencies?

On 1st February, while announcing the Budget 2022, Finance Minister Nirmala Sitharaman announced something unexpected. 

Sitharaman said income from the virtual or digital assets (cryptocurrency) will be taxed at @30%. In addition, @1% TDS (tax deducted at source) will also be levied by the government on these investments.

The 30% taxation is retributive tax, harshly levied, which could for sure discourage many from trading in such assets. 

Though, for an industry that was stressing a countrywide ban at one point, permission to exist even with a punishing tax rate is a blessing. 

The biggest takeaway I understand from Sitharaman’s Budget is not the rate of tax but the fact that cryptocurrencies have finally got recognition in India.  

Nonetheless, a lot of people are in gloom after hearing this news. But let me just tell you that by recognizing the cryptos as a taxable asset, India has also recognized its existence in India along with other crypto assets. 

Unpredictability even further, the gifts in cryptos and digital assets will also be taxed, she added. 

The tax proposal will come into effect from the 1st of April after the passage of the Union Budget in the parliament. 

As per the FSR report, the aggregate market capitalization of the top 100 cryptocurrencies has reached $2.8 trillion in the emerging market economies that are subject to capital management, and free accessibility of crypto assets to residents can sabotage their capital statute framework.

Now, the question is how does the Indian Government ensure that the risks associated with private cryptocurrencies, highlighted by the central bank’s report, do not manifest just by putting a higher rate of tax? 

Isn’t it leaving the field open to the crypto lobby to transact freely only on the condition that a certain tax rate needs to be paid to the Government?  

Ultimately, the fact is the essence of the concern of the Reserve Bank of India that the digital assets can utilize in illegal activities and muddy transactions remain. 

In my opinion, I don’t think that just putting a higher rate of taxation on an asset would decrease the risk associated with it. 

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