Gains arising from transactions in cryptocurrencies became taxable from April 1, 2022, following the Budget announcement to that effect by Union Minister of Finance Nirmala Sitharaman in February of this year.
She announced a 30 per cent taxation on virtual digital assets (VDAs), apart from tax deducted at source (TDS) implications, which came into effect from July 2022.
While the crypto market has been on a downward spiral since early this year, the introduction of taxes have also had an impact on falling volumes of crypto in India. However, investors have also gained from it in some ways.
According to Edul Patel, CEO and co-founder, Mudrex – a global crypto investment platform, investors as well as exchanges have to a large extent already digested the news of taxation on crypto assets, and seem to have made peace with it.
“But, the only thorn in the taxation policy is that crypto losses cannot be offset against crypto gains,” he says.
Let’s look at the details.
Impact On Volumes
After the crypto taxation came into effect, major crypto exchanges witnessed a significant dent in their trading volumes.
Trading volumes on WazirX and CoinDCX dropped by at least 80 per cent. According to statistics obtained from data aggregator nomics.com, trade volumes on Indian cryptocurrency exchanges have significantly decreased after the 1 per cent TDS came into effect from July 1, 2022.
Says Tarun Modi, chartered accountant, and a crypto taxation consultant: “Since the levy of a flat 30 per cent tax on income from crypto transactions, and a TDS of 1 per cent on each crypto transfer, there has been a significant reduction in daily turnover of crypto transaction on Indian exchanges. Most of the users have now shifted to international exchanges in anticipation to escape from this heavy TDS on trading transactions.”
Many start-ups are also seen either moving out of India or considering crypto-friendly countries to execute operations.
Impact On Crypto Investors
Taxation has definitely made the enthusiasm of Indian crypto investors, cold.
Says Shivam Tiwari, 23, a Noida-based engineer, who is investing in crypto for a long time: “Earlier, my crypto profile was around Rs. 5-7 lakh, but it has now reduced to Rs. 2-3 lakh. Now, I try to avoid crypto due to complex taxation.”
Some crypto finance experts, however, believe that the move has been good for investors, as it has reduced speculation and price manipulation in the unsupervised cryptocurrency industry.
“Individuals are now purchasing and holding digital assets, such as Bitcoin and Ethereum for longer periods of time, which will be positive for the crypto economy in the long run. Crypto traders appear to have accepted the imposition of a 30 per cent tax with no loss offset and made peace with it,” says Gaurav Mehta, founder of Catax – a blockchain auditing and taxation start-up.
It also seems to have reduced fraud, as investors are more mindful now, he says.
Adds Mehta: “Due to taxation on every transaction, pump-and-dump activities that prey on unsuspecting investors, are no longer viable. Investors may obtain a clear picture of market participation, trading volume, and adaption, which was previously claimed to be billions on the dollar on a daily basis, and was mostly driven by trading bots and phoney volume that dazzled and enticed new investors into the unregulated and risky crypto asset class.”