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Crypto investors in India were waiting impatiently for clarity on how the government plans to tax these assets. In Budget 2022, Finance Minister Nirmala Sitharaman announced that India will tax all “virtual digital assets" at 30% from April 1. Analysts see the 1% TDS (tax-deductible at source) applicable to every single transaction involving crypto as a problem.

Heavy tax incidence will discourage investors.  "Compliance needs to be smoothed out. Especially around TDS. There are a lot of gaps in how VDAs have been defined. Special circumstances such as staking, forking, receiving cryptos as salary, spending crypto to buy goods and services, and P2P arrangements, also need to be taken into consideration in due course," said Archit Gupta, Founder and CEO - Clear.

The recipient is now liable to pay 30% of his return as tax, irrespective of his level of income. “Although cryptocurrencies are described as assets in the budget, they are being handled differently than other assets. The biased behaviour with cryptocurrencies in the recent budget could have some serious impact on the industry. People also feel that higher taxes will force the industry to leave the country. Some even think that too high a tax may prompt the industry to operate underground as well as move upcoming innovations overseas," said Kunal Jagdale, Founder, BitsAir Exchange.

1% TDS is making the traders, investors, exchanges and other people engaged in this market worried.

“The main question that is plaguing the exchanges is whether 1% TDS will affect volumes, as it will affect all the payments made for transactions of these assets. People are saying that imposing a 1% withholding on the total trade value would make various types of trading, including day trading, margin trading, arbitrage trading, etc, unfeasible. Which can seriously affect order books as well as crypto volumes on their exchanges and will also result in an illiquid and inefficient crypto market," said Amit Gupta, MD, SAG Infotech.

Manoj Dalmia, Founder and Director, Proaasetz exchange said, TDS rate of 1% needs to be lowered standing at least at par with the stock market, to ensure healthy growth in the crypto assets segment.

Possible pros of crypto tax

Tax laws around crypto have given taxpayers some form of certainty about what tax liability they can expect should they sell their crypto holdings. 

Archit Gupta said that having at least some information about what to expect in terms of taxes, will help investors prepare themselves for tax outflow.

However, with the view that has been taken, the authorities have likened these incomes to those from selling lotteries, emphasising that they are being considered purely speculative in nature, he added. 

Manoj Dalmia, Founder and Director, Proaasetz exchange lists out some of the pros of crypto tax

  • Crypto is at least not banned in India (Clarity on taxation)
  • The government gets a good income source in the form of tax.
  • Investors will speculate less with crypto being a risky asset. More long term investments may be seen.

Possible cons of crypto tax

The other big downside is that investors will not be able to set off any losses. This is unlike the view that other economies have taken around the world.

"A lot of research and development is happening in blockchain tech and web3 related work. Several countries are emerging as hubs of this kind of research and development, therefore it is essential to thoroughly understand and address the policy gap. We are hopeful that this will be taken care of via the RBI crypto bill, said Archit Gupta, Founder and CEO - Clear.

Manoj Dalmia lists out some of the pros of crypto tax

  • The tax rate is not clear as there is a lot of compliance involved in the case of filing TDS.
  • People won’t be allowed to set off their losses hence losing taxation benefits.
  • Exchanges will lose volumes due to heavy taxation.
  • Low volumes and trades due to policies will also decrease trades which in return will generate low tax to the government, low income for exchanges and lower profits to traders.

Current crypto tax 

  • 30 % tax rate flat on any income from virtual assets
  • Crypto gift cards to be taxed at the recipient’s end
  • Set off won’t be allowed in case of losses.
  • 1% would be deducted as TDS on buy and sell transactions involving crypto.

However, countries such as the United Arab Emirates and Thailand have reduced their tax rates to become more crypto-friendly. “If the tax rate in India is not reduced, the industry may shift to these more crypto-friendly countries. Some experts believe that it will not bode well for the country if the crypto industry starts moving out of India," said Kunal Jagdale, Founder, BitsAir Exchange

The compliances need to be framed in a manner that could be implemented in a simple manner benefiting both investors, exchanges and government.

Abhishek Soni, CEO and co-founder of Tax2win said, “heavy tax may adversely affect the crypto investment as the rate of tax is very high i.e. 30%. Also, there is no setoff, no carry forward of the losses, and no deduction of expenses. These things may affect the volume of crypto investment. Considering the tax aspect, small investors may shift to mutual funds because the tax rate on mutual funds is less as compared to cryptos in India."

 

 

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