Cautionary tale: India kills crypto industry with new taxes
Cryptocurrency trading volume on key Indian exchanges is down more than 90% after the national government imposed several new taxes on crypto transactions.
On February 1, 2022, the Indian government announced new crypto tax rules, prompting a backlash from the industry. A provision that went into effect on April 1 established a 30 percent capital gains tax rate on all crypto transactions. The provision that most worried investors, however, was a one percent withholding tax (TDS), which came into effect on July 1.
TDS is a tax levied on every single crypto transaction at a rate of one percent of the transaction amount. The tax can be compared to a proposal by Senate Democrats in the United States to establish a transaction tax on every sale of shares, bonds or derivatives.
The nonpartisan Tax Foundation explains that these taxes are extremely harmful because they increase transaction costs, reduce liquidity and cause investors to make inefficient decisions to hold assets longer than they would in a free market. These consequences will be felt most among smaller investors, for whom higher transaction costs are more difficult to absorb.
As further stated by the CEO of Indian cryptocurrency exchange WazirX in March, “1% TDS will kill liquidity, which means profitability ultimately goes down for everyone. It’s lose-lose.”
New monthly registrations for WazirX have dropped more than 60 percent among Indian users since the first new crypto tax took effect in April. Other Indian exchanges such as CoinDCX and Zebpay have seen their registrations drop by 67 percent and 89 percent, respectively, since April.
Trading volumes show an even more serious case for the Indian cryptocurrency market. Between the implementation of the first new crypto tax regulation in April and the end of August, CoinDCX, Zebpay, and WazirX saw trading volume decline by 94 percent, 95 percent, and 99 percent, respectively.
In 2021, cryptocurrency markets boomed in India, with reports showing that the country is home to the largest number of crypto holders in the world. Today, the Indian government has greatly reduced the ability of this innovative industry to thrive within its borders due to over-taxation.
US policymakers should use the case study of Indian crypto markets as a warning: Transaction taxes and over-taxation of asset markets, whether in cryptocurrencies or in traditional stocks, can have devastating effects on investments and the economy as a whole.
