Union Budget 2022-23: Crypto investors look to pare their holdings

Parandeep Goswami, a 27-year-old from Barpeta, a small town in the Northeastern state of Assam, became a crypto investor a few months after the pandemic struck in 2020. His initial capital of Rs 5,000 came from his savings. As he started making gains, his father and brother also contributed to his trades. In due course, Goswami started trading full-time and also diversified a large chunk of his holdings to stocks.

But now, the steep 30 per cent tax rate on crypto gains is making him rethink his allocation. “This means that while my downside on a loss-making trade remains the same, the upside from a good trade will be eaten into by the high tax rate,” he says. Expecting the Budget to have some taxation provision on crypto, he had already brought down his crypto holdings to less than 20 per cent of his investment portfolio last week. 

While crypto firms are relieved that the tax on gains from virtual assets signals that the government is slowly warming up to this asset class, retail investors are concerned that the rate is too steep. Like Goswami, many are looking to pare their crypto holdings.

Several crypto investors and traders Business Standard spoke with said the attraction of the asset class is its volatility. Since prices tend to fluctuate faster than other asset classes, they make an effort to buy on dips and book gains at highs. 

“While I am glad that there is a tax because I think it implies that they’re legitimising cryptocurrency, a 30 per cent tax slab is too much. I will lower my investment in crypto and move towards equity,” says Delhi resident Chaitanya Tiwari, 18, who has invested almost Rs 25,000 in crypto and claims to have made gains of up to 50 per cent. 

Tiwari is not alone to look towards the stock market. Mumbai-based Rishabh Bhargava, who quit his job as an investment analyst amid the pandemic to work as a self-employed day trader in the share and crypto markets, says he will now look to shift his crypto allocation to small cap stocks.

“Till now, we had been paying a short-term capital gains tax of 15 per cent on profits. This sudden spike in the tax payable on crypto gains will encourage investors to look for value in the share market,” Bhargava says. “What I also did not like is that you can’t avail of a deduction on crypto losses. And, there is no provision to set off your own crypto losses against profit-making trades while paying the tax.”

However, the part about offsetting losses on crypto transactions against gains is still not clear in the fine print of the Finance Bill, say experts. “The current language of the proposed provisions is ambiguous on the set-off of crypto losses against crypto gains,” says Pranay Bhatia, partner & leader-Tax & Regulatory Services at tax advisory firm BDO India.

“I am sure there will be a lot of representations from the industry on the crypto tax, and seeking clarity on this issue will be on the top of everyone’s agenda,” he adds.

NFT ambiguity

Also unclear is the taxation on non-fungible tokens (NFTs) in the hands of the creator. While one view is that the creator of an NFT can discount the cost of making it from the money earned by selling the digital collectible, another is that the Budget provision expressly prohibits such a thing as it says that only the cost of acquisition of a virtual asset can be set off against the gains made from selling it.

Toshendra Sharma, founder and CEO of NFT marketplace NFTically, says the good, the bad and the ugly of the taxation provision on virtual assets like crypto and NFT will be clearer over the next six months. 

“There is no doubt that there will be both positives and negatives,” he says. “For instance, the tax indicates that a ban on virtual assets is now out of the equation and this will encourage many people who were sitting on the fence to enter the crypto world. However, it is also true that traders who were making a quick buck on the volatility may bring down their investments.”

Another Budget announcement that might have implications for the crypto market in the long term is the central bank digital currency (CBDC). The finance minister said the Reserve Bank of India will issue a digital rupee this year. While industry players are of the opinion that the CBDC will serve as a gateway to blockchain-based assets like crypto and NFTs for many people, a section of the ecosystem is not happy.

“This ultimately means that crypto will never be allowed to act as a medium of exchange, however popular it becomes. Yes, crypto firms are relieved because it allows them to carry on with their business without any headache,” says a crypto industry executive who does not want to be named. “But the real promise of crypto really is its potential to be the currency of transaction in the future. If that goes away, the music might stop in the market too at some point.”