Will the crypto-asset reporting framework bring clarity to investors?

Cryptocurrency transactions have increased dramatically. The very nature of crypto assets and the ability of investors to hold, transfer, and transact across jurisdictions make them an easy target for illegal activity or tax evasion. The limited visibility of the tax authorities on these transactions makes it difficult to verify the gains and determine the taxes on these transactions.

OECD Guidance: In order to increase transparency between nations, the OECD (Organization for Economic Co-operation and Development) has developed the Crypto Asset Reporting Framework (CARF). The Common Reporting Standard (CRS) required jurisdictions to obtain information from financial institutions and banks and to exchange that information with other jurisdictions. The CARF is a step forward in this direction, as crypto assets do not automatically fall under the domain of CRS which dealt with traditional financial assets and fiat currencies. With CARF, the reporting scope has been expanded to include digital assets and therefore gain visibility into intermediaries, exchanges and e-wallet service providers.

The OECD defines crypto-assets as a digital representation of value that relies on a cryptographically secured distributed ledger or similar technology to validate and secure transactions. Crypto assets are those that can be held and transferred in a decentralized manner, without the involvement of traditional financial intermediaries, including stablecoins, derivatives issued in the form of a crypto asset, and certain non-fungible tokens (NFTs) . There are some exceptions to this, such as central bank-issued currency, specified e-money products, etc. and relevant information to report, etc.

India is a signatory to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. Thus, India should soon comply with the framework required for the flow of information to be fluid.

Crypto taxation in India: Digital asset taxation in India was introduced in the 2022 budget when a 30% tax on all gains from the transfer of Virtual Digital Assets (VDAs) was proposed, without allowing any deduction for expenses (other than the cost of acquisition). ) or compensation for any losses. In addition, the buyer is required to deduct 1% TDS on all VDA transfers over a specified threshold in an effort to broaden the tax base and avoid tax leakage due to non- statement.

Tax provisions of India define VDAs as any information or code or number or token (not being Indian currency or foreign currency) generated by cryptographic means or otherwise, whatever name is called. It provides a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value or functions as a store of value or unit of account and includes its use in any financial transaction or investment, but not limited to. and may be transferred, stored or traded electronically, including non-fungible tokens or assets of a similar nature, however named, and any other digital assets as notified by the central government. Circulars were issued in June 2022 to provide additional guidance on withholding tax compliance requirements.

With the announcement of CARF, the government has an opportunity to develop regulations now, taking into account CARF reporting guidelines. This can incentivize applying CARF to investors as well as service providers residing in India covering a wide range of digital assets. To meet the requirements, service providers would need an enhanced data collection mechanism, such as KYC documents, to ensure that the identity of each of the participants is established, to ensure that the appropriate taxes are withheld for each transaction, an appropriate mechanism for record keeping and reporting, etc. Investors may be required to compulsorily disclose standards in addition to the current tax levy and withholding tax provision.

The guidance provided by the OECD is a welcome move to standardize and regulate digital asset trading, although it may add to the liability of trading. It will provide visibility to regulators and tax officials on transactions, in addition to clarity for investors and trade on their obligations.

Aarti Raote is a partner at Deloitte India.

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Michael J. Birnbaum