The new tax regime for VDA (Virtual digital assets) kicks off today. How is it going to affect you as a crypto investor? What will be its implications for the cryptocurrency ecosystem in India? What possible behavioural changes it may potentially enthuse within the community?
We shall look into all these but before, let’s quickly look at the new tax provisions.
Starting from 1st April 2022, GOI is set to tax income @ 30% from all “virtual digital assets” including cryptocurrencies and NFTs. The new rule also states that the loss arising from the sale of a given virtual asset cannot be offset against the income from any other VDA.
Each crypto transaction will be subjected to a 1% tax deducted at source (TDS) starting 1st July 2022. It will be calculated on the entire crypto transaction value and will be applicable even if one incurs a loss. A cumulative TDS can be set off against the total income tax owed at the end of the year.
These new provisions have drawn mixed opinions from the crypto investors who have sought more clarity in the absence of a legal framework.
Let’s look at some of the major areas of concern.
- How will the offset clause be taken into consideration while calculating the tax liability in case the user has invested in a model portfolio having multiple coins?
- Because the TDS is applicable on all transactions including the loss making ones, how to calculate the net tax liability after offsetting the total TDS paid?
- There is also not enough clarity to the concept of profit itself. As an investor one can have few profitable trades despite being in losses overall. How does the new rule apply in such cases?
The taxes are clearly discouraging and can potentially witness the following operational changes.
- Heavy tax incidence will discourage investors who would eventually move to other investment asset classes such as the stock market.
- Higher taxes will force the industry to leave the country or to operate underground.
- With 1% TDS various types of trading, including day trading, margin trading, arbitrage trading, etc, will become unfeasible.
- Exchanges will lose volumes due to heavy taxation.
- Investors will start transferring their crypto assets to private wallets outside of India.
Some behavioural shifts may also happen:
- Fewer people would be willing to engage with India’s crypto ecosystem
- Developers too could migrate to find more crypto friendly countries to work on their applications.
- Upcoming innovations would invariably move to crypto friendly nations such as Dubai, Singapore and US.
Among so many uncertainties there are some positive outlooks too.
Some experts believe that instead of banning the market completely and by choosing to tax, the government has shown positive intent. This would achieve 2 major outcomes:
- The government gets a good income source in the form of tax
- Investors would turn long term in order to avoid immediate tax liability which would in turn make the market less speculative.
Whatever be the individual perspective, one thing is almost certain that if the government has to ensure healthy growth in this segment, it will have to answer many questions besides bringing down the TDS rate of 1% at least at par with the stock market.