The Budget announcements mean that income from any transfer of crypto, even gifts, would attract a 30% tax. In addition, investors cannot get any deductions and won’t be allowed to set off losses from transfer of such assets against any other income. The government has sent a strong signal against speculation or trading by retail investors, according to analysts.
Attract or dissuade investors?
According to industry players, clarity on taxation will give new customers confidence to enter the crypto market. Darshan Bathija, CEO & co-founder of crypto exchange Vauld, said that the government’s move has addressed concerns around legality and that he expects more Indians to invest in crypto.
However, Sathvik Vishwanath, CEO and co-founder of crypto bourse Unocoin, said, “The tax rate of 30% is the highest among all asset classes and that could dissuade some old investors. But some investors who wanted to get into crypto once taxation clarity was provided may enter the space now.”
Sumit Gupta, CEO & co-founder of one of India’s largest crypto exchanges CoinDCX, said the quantum of tax is too high, which may hamper wider adoption of crypto. “Trading crypto requires specific skills and cannot be compared to gambling. Also, the government allows investors in equities to carry forward their losses and crypto trading should have been given the same treatment,” Gupta said.
Mukul Shrivastava, partner (forensic & integrity services) at EY, said that the higher tax rate may attract a more discerning set of investors looking to make sound investment decisions.
How it compares to stocks
The 30% tax rate means that investors would have to aim for higher returns in relation to stocks, said an analyst. For instance, to make a post-tax gain of Rs 1.1 lakh from selling stocks after 1 year, the return would have to be 12% on a principal of Rs 10 lakh. But to make a similar gain from Bitcoin with the same principal and time, the return will need to be about 15.4%. Stock market investors also have the provision to set off losses.
Expect tougher regulations
Legal experts said that investors will also have to face additional disclosure requirements as taxpayers will have to report income from crypto through a separate column while filing I-T returns. The higher tax rate also hints at tougher crypto regulations, they said. The government has also proposed 1% TDS (tax deducted at source) on digital asset transfers above a certain threshold, which will allow it to capture transaction data. The government has come up with the term ‘virtual digital assets’ for its taxation policy.
Rush to sell off before April?
Though crypto prices went up on the day the Budget proposals were announced, market watchers said investors could rush to sell their crypto assets to avoid paying 30% tax, effective April 1, 2022. However, Central Board of Direct Taxes (CBDT) chairman J B Mohapatra said that transactions done in the current financial year won’t be exempt.
“For existing investors, income from cryptocurrency prior to April 1, 2022 may be taxable as capital gains or as income from business,” said L Badri Narayanan, executive partner, Lakshmikumaran & Sridharan Attorneys. He added that new middle-class investors who wanted to make extra money by putting some risk at stake may find the tax policy impractical. “The threshold to invest and return on investment will be pegged against the high tax rate,” he said.
Though the announcements are a mixed bag for crypto backers, venture capital investors said that the main win is that the government has begun to understand these instruments as digital assets which can be regulated, rather than painting them all as private currencies.
Nitin Sharma, global blockchain lead at venture capital firm Antler, said that active traders are likely to be affected the most. “But those who are beginning to understand this new asset class and want a little bit of exposure for superior long-term returns, they may now see cryptos as more legitimate and feel more peace of mind even at a high tax rate,” Sharma said. He added that Japan has even higher rates (top slab is 55%).
However, there are ambiguities in the government’s proposed tax policy. “There are many complexities that an investor may face such as the meaning of cost of acquisition, set-off of loss from one cryptocurrency against gain from another, valuation and tax on the exchange of cryptocurrency, clarity on NFTs and TDS implications on crypto exchanges,” Narayanan said.
He added that the government needs to provide clarity on the nature of cryptocurrency and its taxation under GST laws. EY’s Shrivastava also said that risks involving money laundering and fraud must be addressed.
Visit www.TimesDecrypt.com for more updates on crypto