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The Impact of Crypto Currencies on the Indian Economy.

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Cryptocurrency has brought about significant changes in the Indian market, attracting new investors and disrupting traditional financial systems. Its impact is still unfolding, but the growing interest and adoption suggest a significant shift in the country’s economic landscape.

Introduction To Cryptocurrency in India

An image in which there are multiple Cryptocurrencies

The journey of cryptocurrencies in India has been bumpy, with a previous ban and the prospect of strict regulations. This virtual asset has faced many obstacles.
Despite regulatory uncertainty, the popularity of cryptocurrencies especially bitcoin has surged in India since 2020, with domestic exchanges reporting over 1.5-2 crore investors and a $10 billion market in November. This growing interest in the unregulated digital asset marks a shift in the country’s investment patterns, previously focused on safer assets like gold. With the Cryptocurrency and Regulation of Official Digital Currency Bill looming, it’s worth examining the journey of virtual currencies in India thus far.
So many questions arise for Cryptocurrency, let’s look into them one by one.

What is Cryptocurrency?

Cryptocurrency, also known as crypto, is a digital or virtual currency that utilizes cryptography to secure transactions. Unlike traditional currencies, cryptocurrencies operate on a decentralized system without any central regulating or issuing authority. The decentralized system records all transactions and creates new units of currency.
It is a digital payment system that operates without the need for banks to validate transactions. It functions as a peer-to-peer network that allows users to send and receive payments from any location. Cryptocurrency transactions are not physical and exist solely as digital entries in an online database that specifies particular transactions. A public ledger records all transactions, and digital wallets store cryptocurrency.
Satoshi Nakamoto founded Bitcoin, the first cryptocurrency, in 2009, and it continues to be the most well-known today. The primary motivation behind the fascination with cryptocurrencies is to trade for profit, and speculators occasionally drive prices up to astronomical levels.

How does Crypto Currencies operate?

Cryptocurrencies operate on a decentralized digital ledger known as the blockchain, which maintains a record of all transactions carried out by currency holders.
Using computer power, mining is the process of solving complex mathematical problems to create new units of cryptocurrency.
If want to use it for transactions, the broker can purchase the currency and store it in a cryptographic wallet.
Unlike physical assets, owning cryptocurrency means owning a key that enables the transfer of ownership of a unit or record between individuals without the need for a trusted third party.
Anticipating more financial applications to emerge in the future, cryptocurrencies and blockchain applications are still relatively new despite Bitcoin’s establishment in 2009.
This technology can enable the trading of financial assets such as bonds and stocks.

Benefits Of Investing in Crypto Currencies

Cryptocurrency Investment can be beneficial. Below given are some of the advantages of investing in Cryptocurrency.

  1. Decentralized nature of blockchain technology ensures that there is no central point of control, eliminating the risk of a single point of failure.
  2. Blockchain technology enables peer-to-peer transactions, making it simpler and faster to transfer funds between parties without intermediaries.
  3. Transactions are verified and processed by the blockchain network, removing the need for intermediaries and reducing transaction costs.
  4. Blockchain-based investments, such as cryptocurrencies and tokens, can potentially generate returns for investors.
  5. Blockchain technology enables streamlined remittances, making it faster and cheaper to send money across borders.

Limitation of Investment in Crypto Currencies

Although investing in Cryptocurrency can be beneficial, due to an increased number of Cyber attacks and other scams happening, investing in Cryptocurrencies can turn into a downside.

  1. A blockchain links transactions to pseudonyms instead of real-world identities, thereby ensuring a degree of privacy.
  2. Criminals can exploit pseudonymity on the blockchain for illicit activities, such as money laundering and ransomware attacks.
  3. Some blockchain networks have become centralized due to the concentration of mining power or the influence of a few major players.
  4. The cost of hardware, electricity, and transaction fees can make it expensive to participate in a blockchain network and earn rewards.
  5. Hackers can exploit security vulnerabilities presented by off-chain transactions.
  6. The value of cryptocurrencies and other blockchain-based assets can be highly volatile, presenting risks for investors.

Is Investing in Crypto Currencies safer?

Due to high market fluctuations and volatility, new investors can face problems that can also turn out to be risky.
Some investors believe that the secure and decentralized method of transactions, provided by the blockchain technology underlying cryptocurrencies, holds long-term potential.
Therefore, before investing, investors should thoroughly research and plan accordingly for the diversification of the portfolio and should choose to invest that much amount that they can bear to lose.
 As investing has its pros and cons it can also be tricky, so one should always do a proper study and analyze the market and be up to date with the market trends.

The Legal Status of Crypto Currencies in India

any central authority in India does not regulate or issue Cryptocurrency, and there are currently no guidelines for resolving disputes related to their use.
Therefore, anyone trading in cryptocurrency does so at their own risk.
The Finance Minister of India, Nirmala Sitharaman, introduced a tax on digital assets, sparking discussions about the legality of cryptocurrencies in the country.
 While the Reserve Bank of India (RBI) Governor and other key ministers have not banned cryptocurrencies, they have not officially recognized them either.
In 2022, the Indian government imposed a 30% tax on profits from cryptocurrencies and a 1% tax deducted at source, marking the government’s first official regulation of cryptocurrency in the country.
The legalization of cryptocurrencies requires an official statement from the Indian government.

Tax Implications of Crypto Currencies Trading in India

In India, the taxation of cryptocurrency is a complex issue that has recently changed.
 In the past, there was no income tax or goods and services tax (GST) on cryptocurrencies in India. However, the Union Budget of 2022 introduced a tax regime for virtual or digital assets that include cryptocurrencies.
As part of this new regime, crypto investors must keep a well-calculated record of their losses and gains as part of their income.
 The authorities will impose a 30% tax on profits earned through the transfer of virtual or digital assets, such as cryptocurrencies and NFTs, and gains reporting will include the acquisition cost.
Furthermore, if the buyer’s payment exceeds the threshold limit, a tax of 1% on tax deducted at source (TDS) will be levied.
If someone receives cryptocurrency as a gift or transfer, it is subject to tax at the beneficiary’s end.
It is not possible to recover any loss incurred from investments in virtual or digital assets against other income.

Key Takeaways

Cryptography secures digital assets known as cryptocurrencies. Due to being a new technology, investing in them is speculative, and it’s essential to understand the involved risks before investing. This article does not recommend investing in cryptocurrencies or ICOs, and individuals should consult a qualified professional before making any financial decisions since every individual’s situation is unique. Investopedia does not make any representations or warranties regarding the information’s accuracy or timeliness contained herein.

Also, Check out our other Blog on the New Income Tax Rules for the Tax Payers
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