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India’s reputation as a technology hub is well deserved, but recent changes to the Income Tax Act have caused many local investors to shy away from crypto assets in favor of traditional investments.
With taxes on both trading profits and individual transactions firmly in place and likely to remain for the foreseeable future, can we expect the slump in crypto trading in the world’s fifth largest economy to continue – and if so, for how long?
In this article, we provide an overview of the taxation laws that form the context for the current move away from crypto trading. We also take a look at some of the impacts this phenomenon is having on investor behavior as crypto traders hope for taxation release in the years to come.
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Changes to the Income Tax Act target cryptocurrencies
Taxes are an inevitable part of financial life, but for crypto traders in countries around the world, including India, investment gains had escaped the attention of regulatory authorities for a number of years.
This grey zone ceased to exist with the amended tax laws announced in the 2022 Budget.
While crypto assets, and the profits made on trading them, should always form part of a taxpayer’s income declaration, recent amendments to the Income Tax Act mean that cryptocurrency profit declarations to the tax authorities are a matter of routine compliance.
Indian tax residents should be aware of the following set of taxes which now apply to Virtual Digital Assets:
- A 30% tax on income from crypto trading (as per section 115BBH of the Act)
- A 1% Tax Deducted at Source (TDS) which is levied on the transfer of crypto assets exceeding 50,000 in a given financial year. This threshold is lowered to 10,000 in special cases (as per section 194S).
Crypto traders have voiced their concerns about the relatively high tax on digital assets on social media and appear to be voting with their feet as they temporarily abandon crypto trading in favor of other investment asset classes.
Investors are growing even more nervous as the prospect of fines and jail time for non-compliance make headlines.
Abandoning crypto and using offshore exchanges are not sustainable strategies
The Indian government is hardly unique in its current attempts to regulate and tax cryptocurrency assets.
As part of a global drive towards KYC and anti-money, laundering and terrorism financing, countries across the globe are tightening their financial surveillance and reporting requirements on nontraditional assets.
Reporting trading gains and holdings held in cryptocurrency wallets is now identical to the procedure for any other form of income and should be approached in a spirit of compliance by local crypto traders.
However, the tendency to minimize tax obligations is hardly a new phenomenon among investors. And many Indian crypto traders are opting to use exchanges based outside of India. This may allow them to skip the reporting steps that are now a routine part of using a local exchange.
Cryptocurrency exchanges based in the country are likely to report gains and holdings to the authorities automatically, while many of the large international exchanges may still not be completely compliant with Indian tax reporting requirements.
Cryptocurrencies are an enticing asset class for investors and will always feature in their portfolios, even if the total allocation is now reduced to avoid high taxes.
Furthermore, the strategy of using non-Indian exchanges will be short-lived. The government is likely to request that overseas cryptocurrency wallets comply with local tax regulations. If these reporting requirements prove too cumbersome, foreign exchanges may start to ban Indian citizens and residents from using their services.
For traders, the question has shifted from “how to avoid crypto taxation” to “when will relief be forthcoming?”.
Is crypto tax relief on the horizon?
As some local traders give up on crypto or take potentially risky steps by trading on foreign platforms, serious investors are asking how long it will be until the government provides an incentive to trade crypto in a legal manner.
Will the state provide some tax relief for active crypto investors who wish to remain tax compliant while reaping the benefits of their trading skills? Perhaps, they will need to seek out their own source of crypto help – finding what crypto exchange platforms, wallet providers, and investment options are available to them.
- At present, the tax laws do not allow losses from crypto trading to counterbalance gains, making it extremely difficult for trainers to manage their tax affairs.
- This is especially problematic given the unpredictable nature of crypto currencies and the potential for large gains and losses in a given year of assessment for taxes.
Nischal Shetty, CEO of the WazirX exchange, made a statement to the media recently predicting that the current crypto taxation landscape would persist for at least two years.
Like any prediction, this timeframe may turn out to be shorter in response to public sentiment or longer if the government determines that the current taxes levied on crypto still generate sufficient fiscal revenue, despite their diminishing effect on trading volume.
Final thoughts
Crypto trading in India has plummeted more than 90% in the wake of the amended tax legislation, and it may be a long time before the market mounts a recovery.
With at least 24 months of heightened financial reporting and higher taxes on crypto assets, traders in India will need to weigh the benefits of investing in fast growing crypto assets that provide a hedge against fiat currency movements, and the realities of a heavy tax compliance burden.
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Disclaimer: The information provided in this post regarding cryptocurrencies and NFTs is for general informational purposes only. Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any losses incurred from such transactions. Cryptocurrency trading involves high risk and may not be suitable for all investors. It is important to carefully consider your investment objectives, level of experience, and risk appetite before deciding to trade cryptocurrencies, tokens, or any other digital asset. TaxGuru does not recommend buying, selling, or holding any specific cryptocurrency. This post does not constitute financial, investment, or tax advice. It is recommended to conduct your own due diligence and consult with a qualified financial advisor before making any investment decisions. The author and TaxGuru do not guarantee the authenticity, accuracy, completeness, or absence of errors in the information provided. Any actions taken based on the information in this post are done at your own risk. The author and TaxGuru shall not be held responsible or liable in any manner for any consequences arising from the use of this information.
