The taxes levied are severe, and they are not comparable to how other asset classes are taxed.

During her announcements, the finance minister put to rest one lingering question: the legitimacy of cryptocurrency. In the budget speech, rapidly proliferating digital currencies that were previously neither legal nor illegal were finally recognised as "digital assets." The FM also stated that the Reserve Bank of India intends to launch its own digital currency — a central bank digital currency — as stated (CBDC). What exactly does this imply?

CBDC's Pathway

A few countries, most notably China, are currently experimenting with sovereign digital currencies. Others are working on it. The RBI's digital rupee will use blockchain technology, just like cryptocurrencies.

Central banks around the world are warming to the idea of CBDCs, partly in response to the proliferation of private and unregulated cryptocurrencies, which carry a number of risks, including anonymity, a lack of regulation and investor protection nets, and the potential for financing crime.

The financial impact

A blockchain is a digital public ledger that is decentralised. It can't be hacked or tampered with. Bitcoin is the most well-known application of this technology, and billions of dollars are exchanged every day.

The decentralisation is crucial in this case. Such blockchains are not controlled by a single individual, company, or government. Central banks are symbols of centralisation, whereas cryptocurrencies are symbols of decentralisation. For the development of its coin, the RBI will use a decentralisation instrument. CBDCs may have an impact on the relationship between central and commercial banks. For centuries, central banks have relied on commercial banks to store, transport, and distribute paper money. These are both time-consuming and expensive tasks. With digitisation, these issues are no longer an issue. As a result, the introduction of a CBDC could have a significant impact on the flow of money. These consequences, however, are yet to be seen.

Taxation ensures legitimacy

Crypto trades were given legal legitimacy by taxation. It indicated that the government will not outright prohibit them. However, the taxes imposed are severe and do not compare favourably with other asset classes. To begin, all cryptocurrency income will be taxed at 30%, just like lottery and gambling winnings—even if the investor is in a tax-free bracket. The payer must deposit 1% TDS on the payee's behalf when making cryptocurrency payments.

Users may be discouraged from transacting with cryptocurrency as a result of this compliance burden. Finally, no deductions are allowed on this income. Losses cannot be offset against gains or carried forwards to the following fiscal year. While trading cryptocurrency is still legal, there is now a strict compliance requirement.

A course of action

The FM also stated that the CBDC will be legal currency and that cryptocurrencies, including non-fungible tokens (cryptocurrencies in the form of art), will be considered "digital assets." The two are not interchangeable.

While the taxation may appear almost punitive, the government has paved the way. It has kept the door open in India for crypto innovations. The announcements are likely to reassure crypto traders while also enthusing blockchain developers about the opportunities that await them. The tax laws are merely a starting point. Regulations to protect investors and nations must still be developed.

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