Profits arising from transactions in cryptocurrencies became taxable from April 1, 2022, following the Budget announcement to this effect by Union Finance Minister Nirmala Sitharaman in February this year.
She announced a 30 percent taxation on virtual digital assets (VDA), apart from tax deduction at source (TDS) implications, effective from July 2022.
While the crypto market has been in a downward spiral since early this year, the imposition of taxes has also had an impact on falling crypto volumes in India. However, investors have also benefited 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 largely already digested the news of crypto asset taxation and seem to have made peace with it.
“But the only thorn in the side of tax policy is that crypto losses cannot be offset against crypto gains,” he says.
Let’s look at the details.
Impact on volumes
After crypto taxation came into effect, major crypto exchanges witnessed a significant bump in trading volumes.
Trading volumes on WazirX and CoinDCX fell by at least 80 percent. According to statistics sourced from data aggregator nomics.com, trading volumes on Indian cryptocurrency exchanges have reduced significantly after 1 percent 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 percent tax on income from crypto transactions and a TDS of 1 percent on every crypto transfer, there has been a significant reduction in daily turnover of crypto transactions on Indian exchanges. Most of the users have now shifted to international exchanges in anticipation of escaping this heavy TDS on trade transactions.”
Many startups are also seen either moving out of India or considering crypto-friendly countries to conduct operations.
Impact on crypto investors
Taxation has definitely cooled the enthusiasm of Indian crypto investors.
Sivam Tiwari, 23, a Noida-based engineer, who has invested 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 because of complex taxation.”
However, some crypto finance experts believe that the move has been good for investors, as it has reduced speculation and price manipulation in the unmonitored cryptocurrency industry.
“Individuals are now buying 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 term. Crypto traders seem to have accepted the imposition of a 30 percent tax without loss compensation and made peace with it, said Gaurav Mehta, founder of Catax – a blockchain auditing and taxation startup.
It also seems to have reduced fraud, as investors are more aware now, he says.
Adds Mehta: “Due to tax on each transaction, pump-and-dump activities that prey on unsuspecting investors are no longer viable. Investors can get a clear picture of market participation, trading volume and customization, which was earlier claimed to be billions of dollars on a daily basis, and was mainly driven by trading bots and fake volume that blinded and lured new investors into the unregulated and risky crypto asset class.”
