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Addressing the taxation and money laundering concerns associated with crypto-assets

Bringing transactions related to crypto-assets within the tax net could make matters less fuzzy.

By Vipul Kharbanda and Aman Nair

Even as crypto-assets continue to establish themselves as a staple of the global financial and technological markets, governments face the problem of applying regulatory systems onto them that are not tailored for the nuances that exist in the crypto-asset space. This, however, can often result in the emergence of regulatory uncertainty, grey areas, and loopholes – all of which can be damaging to both regulators and consumers.

This blog post looks to analyse two ways such gaps have manifested in the Indian context – taxation and money laundering.

What taxes actually apply to crypto-assets?

With the extraordinary increase in the number of people in India who have invested in and made profits from crypto-asset investment, one question which often gets asked is how the gains from these activities may be taxed.

Firstly, in the case of indirect taxation, there is ambiguity on the applicability of GST to crypto-asset service providers. Services provided by crypto exchanges and other crypto service providers are liable to the levy of GST on the amount of the fees or commission that the exchange charges for its services. As there is no Service Accounting Code (SAC) specified for crypto services, there is a lack of clarity as to the slab and in which category the services would be liable to get taxed. This could have been one of the reasons that precipitated the recent GST raids conducted on the offices of various crypto exchanges such as WazirX, CoinDCX, Coinswitch Kuber, etc.

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Further, since crypto-assets are also capable of being defined as property and goods, there is a risk that if other conditions are satisfied, individual incidences of sale of crypto-assets may also attract the levy of GST as a tax on the sale of “goods”.

This lack of clarity also pervades the direct tax regime with regard to crypto-assets. It is fairly clear that for commercial entities such as crypto-exchanges, etc. the income from crypto activities would fall within the head of income from business or profession, since crypto-related activities are their main business. However, it is not as clear whether the profits made by individual or retail investors would get taxed as part of their regular income.

Even if profits from crypto trading do not form part of the regular income of the individual, it could still get taxed as capital gains. This is because of the wide definition of the term “capital asset” contained in the Income Tax Act, 1961 which defines a capital asset to mean “property of any kind held by an assessee, whether or not connected with his business or profession”. Since Indian law defines the term “moveable property” as “property of every description, except immovable property”, crypto-assets can be considered to fall within the term moveable property and therefore, if the gains arising from crypto-assets are not liable to be taxed under the head of income under the Income Tax Act, 1961, they may be liable to tax as gains from the sale of “capital assets” under the Act.

The Central Government appears to hold the same view, as may be seen from the responses of the Central Government to questions in the Rajya Sabha, where the Minister of State for Finance clarified that “gains arising from the transfer of crypto currencies/assets is liable to tax under a head of income, depending upto the nature of holding of the same.” As far as crypto exchanges are concerned, the stand of the government is that the income earned by crypto-exchanges and other crypto service providing platforms is liable to tax under the head Business or Profession under Chapter-IV of the Income Tax Act, 1961.

It is to remove this unnecessary lack of clarity that the government needs to take appropriate measures to amend the tax regime to incorporate transactions related to crypto-assets within the tax net. The exact shape and contours of the regime should ideally be determined by taking inputs from all stakeholders including crypto-businesses, retail investors, financial institutions, etc.

Issues surrounding Money Laundering

Another key consideration that the Indian government faces is the propensity for crypto-assets to be used in order to facilitate money laundering. With the government and RBI both voicing concerns over this, as well as rumours of alleged cash to crypto conversions taking place outside of formalised exchanges, it is imperative that the matter is addressed moving forward.

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At the outset, it is worth reiterating that the possibility of money laundering is not a problem limited solely to crypto-assets and crypto-asset trading. In fact, the Financial Action Task Force (FATF), the global money laundering and anti-terror watchdog, has noted that as of 2021, instances of the use of crypto-assets as a tool for money laundering remain limited in comparison to cases using other traditional financial instruments. That being said, crypto-assets possess certain unique characteristics, such as pseudonymity, decentralisation, and cross-border functionality that predispose them to money laundering in a manner that other financial instruments may not be – and could present a novel problem in the long term.

To that end, the Indian government must adopt a two-pronged approach to this issue: applying existing frameworks and adopting crypto-specific ones.

On applying existing rules, the RBI could enforce existing AML and Combatting of Financing of Terrorism (CFT) standards onto crypto exchanges and other crypto service providers. On developing crypto-asset-specific measures, the FATF frequently issues guidelines specifically dealing with how its existing money laundering recommendations may be modified in order to make them applicable to crypto-assets in a more efficient manner. These guidelines include recommendations such as:

  • Introducing a registration system for crypto-asset service providers for easier monitoring.
  • Obligatory and stringent consumer due diligence practices
  • Risk assessment procedures, etc.

The Indian government can stand to gain much from adopting these guidelines within its own regulatory framework.
It is imperative for the government to engage with the issue of taxation and regulation of crypto-assets so that the unique potential of this technology may be appropriately harnessed rather than imposing heavy-handed measures which would discourage industry and further investment in this sector.


Aman Nair is a policy officer at the Centre for Internet & Society, India, focusing on fintech, data governance, and digital cooperative research. Vipul Kharbanda is a non-resident fellow at CIS, focusing on the fintech research agenda of the organisation. Views expressed are personal and do not necessarily reflect the views of MediaNama.

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