Solving the complexity of computation in crypto taxation
While there have been some hawkish comments from policymakers (including the RBI) about crypto trading and its exposure at the individual investor level, we believe that such attention was largely focused on creating adequate investor protection checks and balances and managing systemic risk across the entire crypto ecosystem. Such political concern is welcome if it leads to stability and greater transparency and accountability for the industry to prosper in the long run.
The government has not yet explicitly given legal status to VDAs, while the reality of taxation is well upon us. Even before the policy action in February 2022, prudent crypto-investors filed tax returns based on their interpretation of what is considered income or capital gains for the tax year ending March 31, 2022 and 2021. In many cases, such calculations of tax liability were either grossly overstated or understated .
Unlike the conventional stock financial markets, crypto investors trade across 8-10 main crypto exchanges registered in India as well as 3-4 primary international exchanges. For those investors who depend on these registered exchanges in India (including a few international exchanges), they are their gatekeepers to access crypto assets.
The complexity of calculating taxes in the crypto world is well and truly appreciated when you look at the various investor use cases that must be factored into the calculation to arrive at an accurate assessment of the tax liability for each crypto investor. This is one way that smart technology solutions to assist the tax calculation process play an important role in delivering peace of mind to the crypto investor.
There is a clear symbiotic relationship between crypto exchanges and crypto tax platforms. The former is the aggregator of individual crypto trading accounts, while the latter can crunch the transaction history data in each of those crypto trading accounts to provide peace of mind when it comes to tax calculation.
Investors increasingly want to track their tax liabilities in real time, not only on their respective individual crypto trading accounts, but also get a consolidated view of their tax liability if they have multiple crypto accounts. Our estimates suggest that on average, every crypto investor in India has between 2 to 3 crypto trading accounts.
Crypto exchanges will benefit in that crypto investors appreciate the transparency and are comfortable coming back to trade more often. It is worth pointing out that the February 2022 policy action led to an 80% drop in trading activity across crypto exchanges as tax uncertainty spooked the investing community.
The crypto investor is not a tax specialist and needs specialist advice or solutions. Given their high frequency of trades (understandable in times of high price volatility) and the complexity surrounding profit calculations involving (a) tracking each transaction based on type, date, time and size; (b) applying first-in-first-out (FIFO) logic for gain calculation; (c) ensure that the cost of each purchase or transfer (of a VDA asset) is explicitly recorded; (d) ensure that currency conversion rates are used in the final tax calculation for purchases on international exchanges in US$; (e) proper tax treatment of contributions, interest earned; forking, airdrops etc.
By delivering transparency and security for tax calculations, the crypto taxation platforms provide significant peace of mind to crypto investors, which in turn helps them pursue their investment goals with a single focus. From a crypto exchange perspective, solving the tax calculation challenges leads to a more stable customer environment, where the focus is back on investing; it allows exchanges to innovate on product offerings as well as accommodate the diversity of demand from their customer base.
(Indy Sarker is co-founder of TaxCryp Technologies)
