Money
Will budget suck the life out of crypto trading?
Summary
30% tax, 1% TDS and no provision for loss set-off and carry forward set to impact investors
Devanshu Khanna, who started trading in crypto assets in January, is worried that certain Budget proposals may put a big dent in his profits. A systems engineer by profession, Khanna trades through a bot on a global crypto platform. Crypto trading bots automatically execute fast-paced buying and selling orders based on a specific trading strategy. Khanna is confident that even with a 30% tax on crypto gains, he would be able to make a decent profit. “However, the 1% tax on every crypto transaction will eat into my profits," he fears. Many traders like Khanna are a worried lot today that the current Budget taxation proposals might make crypto investing unviable in India. The Budget 2022 has proposed that gains from virtual digital assets or crypto assets would attract a tax of flat 30% plus cess and surcharge where aggregate income is in excess of ₹50 lakh. Further, the government has introduced tax deducted at source (TDS) at the rate of 1% to trace the transaction trail and widen the tax base.
According to Sujit Bangar, founder, Taxbuddy.com, most of the investors have multiple transactions in cryptocurrencies. “Important point to note is that we may sell a cryptocurrency at a profit or loss, but the TDS would certainly happen. However, we can claim refund of TDS on transactions involving loss," he said.
Arbitrage seekers and traders in the crypto market execute 10-20 trades a day, which can go up to 1,000 in a year, to make profit off small price fluctuations in crypto assets. Naimish Sanghvi, founder of Coin Crunch India feels that the TDS on every single transaction will have a big impact on day traders. “The government has very smartly created a web, wherein the crypto industry will get choked. With current regulations, I feel the market will be dead in no time," he said.
Darshan Bathija, chief executive officer and co-founder of Vauld, a crypto trading exchange and lending startup, feels that levying of a TDS on transfers and payments will hurt active traders, since it shrinks their capital with every trade. Crypto experts estimate that because of the 1% TDS on each transaction, if a trader starts with ₹1 lakh amount, he or she would be out of the capital by around 300th trade if there is no loss or profit made at each trade. “Investors would have to make a big profit on each trade for trading to make sense, which is unrealistic," said Sanghvi.
As an exemption, TDS provisions will not be applicable if the consideration payable is less than ₹50,000 by individuals or Hindu Undivided Family (HUFs) who do not have any business income or whose total sales turnover, or gross receipts do not exceed ₹1 crore in the case of business and ₹50 lakh in the case of profession during the financial year preceding the year in which such an asset is transferred.
“In the case of any person other than the above, the said limit is proposed to be ₹10,000 during the financial year. These TDS provisions are likely to take effect from 1 July 2022," said Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm.
Bathija and Sanghvi fear that these Budget proposals are likely to cause reduction in liquidity and cause short-term volatile movements in crypto assets. Apart from trading perspective, crypto experts also feel that a tax of 30% and lack of provision for loss set-off as well as carry forward will impact retail investors. “Any expenditure (other than the cost of purchase) or set-off of any loss while computing income in the event of a transfer of such asset would be disallowed, which is another concern on the part of crypto investors. Additionally, carry forward of such losses is not allowed as well. Even cryptocurrency gifts would be taxed," said Maheshwari. Additionally, even if you are falling into a bracket where you are not liable to pay any taxes, you will end up paying taxes for crypto earnings.
Kashif Raza, founder of crypto education platform Bitinning, feels that the government has imposed a taxation equivalent to gambling, fantasy sports industry or lottery. “The government probably wants people to get discouraged to enter into the crypto industry. So, today if investors want to invest ₹10,000, they will think twice and might go with stocks now," said Raza. While, there is a consensus among the crypto community that the tax proposals are restrictive, they also agree that proposals have lent some credibility to VDAs.
Ajeet Khurana, a crypto advisor and investor, feels after the budget acknowledgment, a large amount of new money from corporations, high networth individuals (HNIs), family offices, etc, who really wanted to invest, will come into the market.
Sandeep Jethwani, co-founder of dezerv, a wealth–tech firm, says that family offices and HNIs are not yet rushing into crypto, as they are not fully convinced that this asset class is legal as of now. “Even with full legality, there will be some early adopters of crypto, and with over a period of time with significant flows coming in, more and more family offices and HNIs will come into the market."
However, according to investment advisors, some people are already looking to take money off the table. “Traders look for 1-2% price moves to make profit. If there is 30% tax, TDS and you cannot offset losses, it reduces the appeal for trading in cryptos," said Amit Kumar Gupta, a New Delhi-based portfolio manager at Adroit Financial Services Pvt. Ltd, a Sebi-registered portfolio management firm.
He fears that the 30% tax provision on crypto gains in Budget 2022 might also be implemented retrospectively, thus further hitting crypto appeal.
