Tax man: India’s new tax policies could prove fatal for crypto industry

Indian crypto tax policy has become the hottest topic for Indian crypto traders and exchange operators as it is set to become law on March 24 and will come into effect starting on April 1. 

The proposed 30% crypto tax is the highest in the country and is equivalent to the tax imposed on gambling and lottery tickets. While the high tax bracket was already a cause of concern for many new and small traders, a recent clarification from the government has made things even more complicated for the Indian traders.

The parliamentary clarification on March 22 indicated that each crypto trading pair would be independently considered and traders can’t offset their losses against profit on another trading pair. This means if a trader invests $100 each in two tokens and incurs losses on one investment while making a profit on another trade, they would have to pay taxes on their profitable trade without accounting for the losses.

Nischal Shetty, founder of WazirX crypto exchange, told Cointelegraph, “As per response by P.P. Chaudhary in the parliament today, investors will not be able to offset losses from one crypto trading pair by gains from another type. Moreover, it also mentions that the mining infrastructure costs will not be included in the cost of acquisition to be claimed as a deduction.” 

“Treating profits and losses of each market pair separately will discourage crypto participation and throttle the industry’s growth. It’s very unfortunate, and we urge the government to reconsider this.”

Previously, a 1% transaction deduction at source (TDS), which was supposed to come into effect on June 1, was the primary concern for crypto entrepreneurs and exchange operators, as they believed a 1% TDS on each crypto trade would dry up liquidity on exchanges. 

If you start with a capital of RS 51000, by trade no 11 - 10% of your capital will be locked as TDS and 50% by trade no 69.

— Aditya Singh (@CryptooAdy) March 24, 2022

However, many believe that this recent clarification about traders not being able to offset their losses against gains could potentially kill the nascent industry.

Akash Girimath, a crypto trader and technical analyst, told Cointelegraph that a 30% tax bracket might not be that bad of a thing, given the crypto market is still volatile and prone to scams. He said a high tax barrier would help discourage “unbeknownst investors from diving headfirst into cryptocurrencies.” 

In light of the news about offsetting losses, however, Grimath believed it would not be a wise tax model, stating, “If the recent reports about the crypto tax bill are true and if traders cannot offset their losses from one crypto by gains from another or vice versa, will definitely discourage traders from reporting their gains.”

“The regulators need to understand that it is not hard to skirt the law, especially with the recent interest in Web3 and the rise of decentralized exchanges and mixers. It will be interesting to see how the Indian watchdogs plan to curb or regulate and tax the decentralized finance space.”

Grimath said that from a trader’s standpoint, the 30% tax isn’t as scary as the 1% TDS. He stated that if the TDS is levied on crypto transactions, it will be a massive blow to traders. But, if it is applicable only at on/off-ramps, then it will make life much easier for crypto traders. 

Another crypto trader, who preferred to remain anonymous, bashed the recent government policy and said it sends out the wrong message to entrepreneurs in the country. Talking about the high 30% tax bracket, he said:

“It will impact adversely. It’s not a system that embraces or accepts crypto, it’s a crypto penalty tax and a desperate measure to earn extra tax income. Nothing has affected the crypto ecosystem to date and the crypto tax is nothing new. People always find better ways to be in crypto.”

Namish Sanghvi, crypto trader and entrepreneur, suggested traders should sell all their holdings before April 1 and start fresh. He also acknowledged that if the crypto tax policy is made into a law, “trading will be entirely stopped. Only investing for a longer-term is being encouraged.”

My suggestion to sell off everything applies to those who are in overall profit. That way you can still offset your losses with profits before March 31. If you’re only in profit, or only in loss across all your investments, then it’s wise to just hold! https://t.co/4RxKH8xKOT

— Naimish Sanghvi (@ThatNaimish) March 21, 2022

High crypto taxation policies have failed around the world

India is not the first country to propose a high crypto tax policy. The Southeast Asian nation of Thailand previously proposed a 15% tax on crypto gains but faced a wave of criticism from small and retail traders in the country. As a result, the government not only scrapped the 15% crypto tax proposal it also exempted traders from the 7% mandatory value-added tax for trading on regulated exchanges.

South Korea, which is known for its strict regulatory policies, proposed a 20% tax on crypto gains above 2.5 million Korean won. Due to the lack of clear regulations around the crypto market, however, lawmakers postponed the high tax proposal by one year.

Conversely, Singapore, one of the fastest-growing crypto hubs in Asia, does not have a capital gains tax on crypto at present, although it does have a nonfungible token (NFT) trading tax introduced in March 2022. The country is also one of the most evolved in terms of crypto regulations. 

In Portugal, cryptocurrencies are only taxable if done as a professional trading activity. While the country follows European Union guidelines on digital asset regulations, the policies in the country encourage traders and investors with tax-free crypto earning policies. 

The Indian government, on the other hand, seems to be more determined to discourage people from getting into crypto with its regressive policies. Despite growing outrage, the government has failed to establish a dialogue with stakeholders of the thriving crypto industry in the country. 

Varun Sethi, Indian tech lawyer and a crypto enthusiast, told Cointelegraph that the first logical step should be setting up a regulatory authority for cryptocurrencies quite similar to what Dubai, Singapore, Australia and the United Kingdom have done. He also acknowledged that comparing the crypto law of Singapore, Dubai, Hong Kong and the United States with India may not be completely fair since these countries don’t exercise capital controls.

The Indian crypto ecosystem has thrived over the years despite uncertainty on crypto regulations and regular calls for a blanket ban by the Indian central bank. India has produced several crypto unicorns such as WazirX, CoinDCX and CoinSwitch over the past couple of years. Many more foreign investors have been eagerly waiting for better regulatory clarity to invest further. However, the latest tax policy poses a severe threat to the years of infrastructure developed by crypto firms.

Mohammed Danish, chief legal officer at BitDrive Exchange, told Cointelegraph that the government’s policies would push traders to look for alternatives and may force them into gray markets:

“The Government is axing its own foot by introducing such punitive tax rules on crypto trading and investments. Indian crypto exchanges use Know Your Customer processes before allowing any person to trade on their platform with government authorities using this KYC data to trace down the miscreants for law violations. Now, this newly proposed tax rule of 30% rate, coupled with 1% TDS and no allowance for setting off trading losses, is likely to drive away crypto traders to gray markets and will prove detrimental for the crypto exchanges, which are eyes and ears of the government during legal investigations.”

India has shown great potential in the fintech industry, as a significant number of crypto projects have Indians in key roles. Killing the nascent industry with an impractical tax policy would only lead to brain drain. India cannot afford to miss on the crypto boom as it did during the late 90s and early 2000s dot com boom, and only better and inclusive policies could help them achieve that.