Your gain is my gain, but your loss is not my loss: This is perhaps the feeling among many Indian crypto investors about the government’s stand on taxing crypto gains at 30%, the highest slab, but not allowing losses to be offset against other income.
If you had invested Rs 1 lakh in Bitcoin a year ago and sold it now, you would get back just about Rs 56,000 as the token’s price has fallen. However, this 44% loss will not be adjustable against other income while filing taxes. As a result of this double whammy, many investors have started to explore ways to minimise the tax impact.
“Crypto investors don’t seem to be happy with the 30% tax. Many say it may have dampened the excitement around Indian crypto investments,” said Vihang Virkar, partner at Lumiere Law Partners. The tax has forced most investors and startups to take a relook at their strategies. Many backers are looking to hold their assets for the long term and have stopped daily trading. This trend, in turn, has hurt crypto exchanges’ volumes and revenue.
“One of the ideas that investors seem to be toying with is trading through decentralised crypto exchanges. These are blockchain-based applications that facilitate peer-to-peer (P2P) trading of cryptocurrencies,” Virkar said.
According to industry players, the shift to decentralised exchanges is happening at the cost of the popular centralised ones in India, which collect KYC data from customers. Volumes at popular crypto exchanges have plunged by as much as 70% since April 1, industry players, who didn’t wish to be named, said. Experts, however, are not gungho over the benefits of using decentralised exchanges as they feel crypto assets will be taxed whenever they are converted to fiat currency (rupee). Some investors are seeing opportunities in gaming and metaverse-related crypto tokens. They are also looking to earn passive income on their holdings. Investors believe this will reduce their transactions and tax liability.
Apassive income method known as “staking” is becoming popular. Staking refers to a process where holders of certain cryptocurrencies are rewarded by exchanges for allowing their holdings to be used for validating blockchain transactions. “I am only investing when there is a big dip, not doing daily trades. I am buying NFTs if I think they have some potential and getting into passive income from crypto,” a member of Reddit forum CryptoIndia said. Nonfungible tokens (NFTs) enable ownership of digital art using cryptocurrency’s blockchain technology. When an NFT is created and sold, the cost for its generator is negligible. Also, capital gain/loss isn’t applicable here. Due to lack of clarity, industry players are not sure how proceeds from NFT sale by the originator would be taxed.
Legal experts also said that Indians are exploring in- direct exposure to crypto. “This involves investing in units that derive value from underlying crypto assets. This is akin to a mutual fundtype investment. However, investors should note that there are currently no Sebi-regulated products that invest in crypto assets,” Virkar said.
Crypto platform Mudrex said that nothing major has changed for them from a compliance perspective. “However, we have now also taken up a task to educate our users about new taxation rules,” said Edul Patel, CEO and co-founder of Mudrex.
“It is only when the TDS obligation comes into effect on July 1 that the real impact of the regulation shall be known,” said Abhishek Malhotra, managing partner at TMT Law Practice.