India most likely to treat cryptocurrencies as Commodity

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India's Finance Minister announced a couple of weeks ago that the government had already drafted a bill to regulate cryptocurrencies. The bill was needed because currently investors, service providers, regulators, banks, and tax officials are not sure how to deal with cryptocurrencies. Investors are not aware of how to declare holdings and gains. Service providers do not know how to deal with regulators, who do not know which law to use to regulate cryptocurrency dealings. This confusion earlier led to a ban in cryptocurrency trading in India, and the same ban was later overturned by the Supreme Court saying that RBI does not have powers to ban digital asset trading under any law in India.

India's Central Bank Governor stated in an interview recently that the central bank's stance is clear - Cryptocurrencies are dangerous and should be banned. He also mentioned that his views are not much different from the Finance Ministry. That was quite negative for over 17 million cryptocurrency users in India. However, just yesterday, some positive news surfaced. Reporters from one of India's leading English newspapers have learnt that the Indian government may be ready to treat cryptocurrencies as a commodity. That is exactly how cryptocurrencies should be treated in my opinion as adding the word currency to something does not make it a currency.

Thankfully, Bitcoin's comparison with Gold and its evolution as a store of value has fallen on the ears of India's officials responsible for drafting the new bill. I must state here that unless the bill gets approved, one should be extremely cautious about dealing in cryptocurrencies and if they do deal, then one should be completely transparent about the holdings with tax officials. I heard a story today from my accountant, a story I cannot vouch for, that one of his clients went to prison for not declaring cryptocurrency holdings/capital gains. This is because cryptocurrency does not have legal recognition in India. Cryptocurrencies are also not illegal in India but the confusion will almost certainly cause pain for smaller investors.

The other things that are interesting to note in the new reports that are coming out are that India may have different treatments for different cryptocurrencies based on their use case. I guess stablecoins will be treated as currencies and they made not make it alive after India's bill is out. The new bill will provide a definition for cryptocurrencies and will suggest a taxation policy for them. There may be restrictions in terms of how one can use them. India may limit the use of cryptocurrencies for payments or taxation.

What I know for certain is that if cryptocurrencies are not outrightly banned, then the bill will be extremely detailed and cover all aspects that come with cryptocurrencies. Definition and Taxation policy will be based on the end-use of cryptocurrencies and there will certainly be limitations. Whatever be the limitations, I think as long as the government allows investors to trade the asset class, then that itself is a huge win for the community.

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