Investors with diversified portfolios are always looking for a new asset class or type to increase their profitability, and cryptocurrency is often discussed as an option. But how viable is cryptocurrency as an investment for investors in India, after the realities of Indian taxes are factored into the equation?
For investors in India, building a diversified portfolio and getting ahead is just as important as it is everywhere else. With this in mind, many investors have looked to the emerging asset class of cryptocurrency as a potential for high-risk, high-return investment. Cryptocurrencies like Ripple and Bitcoin are often compared to digital gold and have made a name for themselves in recent years as a potential store of value against inflation. But does investing in cryptocurrency remain viable with the current tax realities in India?
There is no question that investment in cryptocurrency can be a perfectly reasonable way to expand a portfolio and diversify it in new ways, and that many cryptocurrencies have a significant potential for growth. These are a whole host of tools that track the prices of different cryptocurrencies to allow investors to choose the best moment to buy, such as this XRP / USD price indicator. These tools, and many others like them, make investing in cryptocurrency, whether it be for a short time and high profit, or as part of a longer-term investment strategy, much easier.
However, as investors in India are likely to be well aware, the Indian tax system is one of the strictest in the world for cryptocurrency assets. So, exactly how viable is cryptocurrency as an investment asset for Indian investors, and how might investing in it affect overall tax strategies?
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Cryptocurrency Can Be Useful as a Diversified Investment
One of the most common ways that cryptocurrency has historically been used is as a high-risk, high-reward asset that is added to complement an already diversified portfolio. Unlike many other sorts of assets, like gold, that are usually used by investors, most crypto remains very volatile and has a regulatory environment that is still, at best, in its nascency.
For investors in India, the risk balance typically associated with crypto assets is to have only a small portion of a diversified portfolio devoted to them. This shows that while some exposure to crypto is seen as valuable, the potential damage from changes to regulation or price swings in such a volatile market necessitates walking a careful line between overexposure and participation.
When examined from the perspective of strategising around taxes, crypto must be viewed through an entirely different lens than other investments for investors in India. The same sorts of strategies that apply to other assets will not work. This is largely due to the way that cryptocurrency is taxed in India.
How Does India Tax Cryptocurrency?
Cryptocurrency is taxed under the same rules as other digital assets in India, and is classed as Virtual Digital Assets (VDAs). The current rules in the Income Tax Act that apply to VDAs state that any profits from transferring them are taxed at a flat 30% rate. This flat rate is unaffected by the investor’s income bracket, which is awful news for investors who would normally be taxed at a lower rate.
As if this wasn’t already bad enough, the 30% flat rate isn’t all that Indian investors must pay on cryptocurrency gains; they also have to pay:
- A health and education cess of 4%.
- A 1% Tax Deducted at Source (TDS) on some eligible transactions.
- Any other applicable surcharges.
While it was intended to make transactions more trackable, the 1% TDS requirement is the thing that hurts crypto traders and investors in India the most, because it makes it much harder for traders to act with liquidity. But the biggest tax challenge for crypto investors in India is the inability to offset losses.
No Offsetting Crypto Losses
Investment in other sorts of assets and stocks allows investors to strategically use losses to reduce tax on gains they’ve made elsewhere. This is not the case when it comes to cryptocurrency in India. The current regulatory tax environment means that investors in India cannot:
- Carry crypto losses forward to future tax years.
- Offset losses in crypto investments against income.
- Offset crypto losses against gains in other crypto.
It doesn’t take much imagination to see how this can make investment in cryptocurrency in India much less attractive than investment in other asset classes, especially for investors who are attempting to carry out some sort of effective tax strategy. This has, interestingly, meant that investors who are interested in crypto are less likely to trade at a high frequency, and are more likely to hold positions for longer times, but that doesn’t completely eliminate the tax burden on crypto.
What Are The Tax Burdens Outside of Trading?
While trading in crypto is an obvious point of taxation, there are a number of other common cryptocurrency activities that can also create a further tax obligation for investors in India. The complexity of these activities and the tax burdens associated with them is such that most investors simply use software to help them track all the necessary activities and calculate the associated tax burden.
This software makes it easy to keep track of relevant information like:
- Exchange fees.
- Sale values.
- Purchase prices.
- TDS deductions.
- Income generated from rewards.
- Transfers to and from wallets.
With so many different relevant actions, it becomes increasingly important for investors to keep accurate records in order to meet tax compliance obligations.
Final Thoughts
Investors in India who are examining the viability of investment in cryptocurrency should note that it does provide the opportunity for growth. However, that growth must be tempered with a high level of strategic planning, especially with regard to how cryptocurrencies are taxed in the country.
