What are Stablecoins? How are Stablecoins Taxed in India’s Crypto Ecosystem?

Key Highlights 

• Stablecoins are a subsection in the cryptocurrency coins that were invented to combat a few issues that cryptocurrency coins faced, mainly volatility. 
• Stablecoins are cryptocurrencies wherein the value of the coin is that of another currency, commodity, or financial instrument such as the US Dollar. 
• In India, stablecoins fall under the definition of Virtual Digital Assets introduced in the Finance Act 2022, under Section 2(47A) of the Income Tax Act. 
• Since stablecoins have a defined asset class, there are regulations in place to tax the instrument. 

What are stablecoins? 

Stablecoins are another form of cryptocurrency wherein the coin’s value is pegged or tied to that of another currency, commodity, or financial instrument. 

But before diving fully into stablecoins, one must understand why they were introduced. 

One of the biggest drawbacks of cryptocurrency that investors face is the volatility in the coins. For traditional investors and the general market, volatility can be quite risky and can also lead to speculation. Another issue is that some cryptocurrencies observe a price plunge after the initial few days or a routine cycle of pump and dump. This is not ideal for investors. 

Stablecoins were thus introduced for investors who would want to have fairly regular safe investments but want to expose their portfolio to cryptocurrency.

Stablecoins bridge the worlds of cryptocurrency and everyday fiat currency because their prices are pegged to a reserve asset like the US dollar or gold. This dramatically reduces volatility compared to something like Bitcoin and results in a form of digital money that is better suited to everything from day-to-day commerce to making transfers between exchanges. 

The combination of traditional-asset stability and digital-asset flexibility has proven to be wildly popular. Billions of dollars in value have flowed into stablecoins like USD Coin (USDC) as they have become some of the most popular ways to store and trade value in the crypto ecosystem.

What are some of the features of Stablecoins? 

1. Minimize volatility 

The main reason for introducing stablecoins was to reduce volatility. Since stablecoins are pegged to more stable assets, investors have some sort of certainty that the value of their token won’t experience heavy volatility. 

2. Transact easily 

Stablecoins are easy to store, transact and transfer between different geographies. Not only that, they’re easy to buy and hold. Individuals have transferred millions of dollars worth of USDC with transfer fees of less than a dollar. Due to the nature of fast processing transactions at extremely low fees and the highest order of safety measures, stablecoins like USDC are a good choice for sending money anywhere in the world.

3. Earn interest on your coins by staking

Given the current market environment, it may not be the best option to transfer your coins to a particular company/organization to gain interest rates on them. However, with due diligence and a good market and investor sentiment, it’s possible you can earn interest on your stablecoins that are higher than the traditional market interest rates. 

How are stablecoins taxed? 

According to the Income Tax Regulation of India, Stablecoins come under the category of Virtual Digital Assets under Clause (47A) under Section 2.

Virtual Digital Assets are defined as such:

“Any information or code or number or token (not being Indian currency or foreign currency) generated through cryptographic means or otherwise, by whatever name called, providing 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 a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;”

From April 1, 2022, Income from the Transfer of all Virtual Digital Assets is taxed at a flat rate of 30% plus applicable surcharge and cess. 

Since stablecoins come under the category of Virtual Digital Assets (VDAs), the income earned would be taxed at a flat 30% tax rate plus applicable surcharge and cess. 

Other taxation pointers for stablecoins in India

• No deductions: In respect of any expenditure (other than the cost of acquisition, if any) or allowance, no deduction shall be allowed in computing the income from such transfer of stablecoins. 
• Losses in stablecoins cannot be set off: Loss from the transfer of one stablecoin, say USDT, cannot be set off against income from the transfer of another stablecoin/token. This is similar to other cryptocurrencies wherein the loss from one transaction/trade cannot be set off against a gain from another transaction/trade. 
• Losses cannot be set off against other Incomes: Like the point mentioned above, losses in stablecoin transactions cannot be set off against other incomes of the assessee.
• Losses cannot be carried forward: Additionally, to add to the woes of the investors, stablecoins losses cannot be carried forward to succeeding assessment years to set off against those gains. 

In short, you need to pay taxes on all your gains for your stablecoin transactions and trades. But in case of losses, you cannot net it off against other gains of stablecoins/crypto coins, other gains of different asset classes, or carry the losses forward. 

It’s an accrual world, and so,

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Frequently Asked Questions 

1. What are stablecoins? 

Stablecoins are a type of cryptocurrency wherein the value of the coin is pegged to an underlying asset that is stable and does not experience heavy volatility. For example, stablecoins can be pegged to the US Dollar, Gold, etc. 

2. Are stablecoins famous, and are they safe? 

Yes, and yes. In fact, many individuals who want to diversify their portfolios with cryptocurrency but do not want to experience the volatility side of things add stablecoins to their investment portfolios. Stablecoins are also easy to transfer and safe to hold. 

3. How are stablecoins taxed in India? 

Since stablecoins are considered Virtual Digital Assets, they are taxed like other VDAs at a flat rate of 30% plus applicable surcharge and cess on the income earned from such transfers.