India saw an unprecedented growth in the number of crypto investors as Bitcoin skyrocketed to an all-time high of about $67,000 last September before falling.
On February 1, the Union Budget introduced a special provision to tax profits from cryptocurrency investing, removing any ambiguity on how such gains must be treated.
The government for the first time defined ‘virtual digital assets’, which includes cryptocurrencies and Non Fungible Tokens or NFTs. The broad definition of virtual digital asset (VDA) could also mean more than just cryptocurrencies and NFTs.
From April 1, a flat 30% tax will be applicable on profits from the transfer of crypto assets, irrespective of the holding period. At that tax rate, crypto gains are treated the same way winnings from gambling, lottery or horse-racing
Not just this, to track the money trail, a 1% TDS on payments made for transferring digital assets will be levied above a specified monetary threshold from July 1. Importantly, losses cannot be set off against any other income.
Tax expert Nishant Shah explained how the provisions work:
- 30% tax on profit from transfer of virtual assets
- No expenses other than cost of acquisition are deductible
- Buyer of crypto has to withhold 1% TDS before paying
- Exchanges may undertake TDS compliance
Experts say that losses arising from crypto trading can be set off against crypto gains in the same financial year. While crypto trading is not illegal, the government has made it clear that it does not want to encourage it either.
Sitharaman has even said the government taxing income from digital assets does not grant them legitimacy. At least, not yet, as the government is working on a separate legislation for regulation.
Nonetheless, cryptocurrencies have emerged as an asset class that many are including in their overall portfolio. For example, investment platform Mudrex offers investors theme-based crypto baskets that can minimise risk. It is attracting long-term investors by simplifying crypto investment
Mudrex Founder Edul Patel told Business Standard how Indians are embracing crypto as an investment product:
- Growing investor community looking for simple products
- Cryptocurrencies are uncorrelated with each other
- Regulation will bring in more investors
Although investors believe taxation has given the much-needed legal acceptance for cryptocurrencies, the TDS provision is being seen as a big disincentive to trading.
Naimish Sanghvi of Coin Crunch India explained the impact of this provision on Indian crypto trading ecosystem:
- TDS on trading in international exchanges unclear
- 1% TDS erodes capital, detrimental to traders and market-makers
- Volume on exchanges will die down
Complications arise even with peer-to-peer transactions that happen outside of an exchange. The buyer of the cryptocurrency would have to collect the seller’s PAN number and go through a cumbersome process to deposit TDS. How many would follow this rule and how the government will enforce compliance is not known yet.
We now understand that the Budget provisions heavily discourage day-to-day transactions and trading. In the absence of an overarching legislation to regulate cryptocurrencies, that addresses tax concerns at different points of the cryptocurrency trading chain and cross border transfers, several questions still remain unanswered. Meanwhile, the industry is seeing the tax proposal as a first step towards full-fledged regulation of the sector.
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