Crypto taxation. Crypto taxation: Why it is punitive and deterring

What is all the fuss about taxing crypto assets?

The Union Budget contained a rude shock for users and traders of crypto and other virtual digital assets. All transfer or sale of these assets was brought into the tax net. The intention behind this move has been spelt out in the Union Budget as well as by the Finance Minister on various occasions. The Centre is worried about the increase in activity on unregulated crypto-trading platforms such as WazirX, CoinDCX, Zebpay, etc. Gullible investors who are unaware that the cryptocurrencies do not have any underlying worth, have been lured by the meteoric rise in the prices of these assets in 2020 and 2021. But the extremely volatile and speculative nature of these assets puts investor money at great risk. Further, with no regulatory supervision on any of the trading platforms, investors face the risk of losing all their money if any of these platforms default or shut down. The Centre is still deliberating on whether to regulate these trades or to ban them all together, the way China has done.

What is the taxation that has been proposed?

There are five aspects to the crypto taxation in the Budget. One, any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent. When surcharge and cess are added, the tax rate goes up between 33 and 42 per cent. Two, no deduction is provided while calculating the income, only cost of acquisition is allowed, if any. So cost of mining or any other cost cannot be shown as expense to reduce the profit. Three, loss from transfer of virtual digital asset cannot be set off against any profit from any other source. Profit made in one cryptocurrency cannot be set off against loss made in another cryptocurrency, either. Four, gift of virtual digital asset is also proposed to be taxed in the hands of the recipient. Finally, TDS is to be levied on transfer of such assets at the rate of 1 per cent.

Why are experts calling it a punitive taxation?

The Centre is clear that it is viewing trading in cryptocurrencies on a par with other speculative activity such as lottery or gambling. That is the reason why the tax on income is much higher than the capital gains tax charged on other capital assets. The amendment to the Finance Bill further clarified that cryptocurrencies cannot be construed as capital assets. Disallowing setting-off of losses, not allowing deduction of any expenses and taxing gifts are punitive and another way of telling investors to stay away from these assets.

How have the crypto players reacted to this?

The stakeholders in the cryptocurrency space including trading platforms and wallet providers are clearly unhappy at this move. Initially, they tried to give the spin that the government’s move to tax them makes these assets legal. But various government officials have denied this interpretation stating that taxing cryptocurrencies does not amount to legitimising them. The crypto industry then lobbied with the Centre to roll back the taxes. But now that the Finance Bill has been passed on Friday, these players need to get ready to face the changed circumstances.

What next for crypto exchanges, investors?

Crypto trading platforms will now be constantly under the glare of the Income Tax Department which will now require these platforms to maintain records of all transaction done on them, collect TDS of 1 per cent on the sale and deposit the money to the IT authority. The compliance burden is going to be onerous and many exchanges are likely to shut shop. Investors may not want to buy and sell on Indian cryptocurrency platforms due to the requirement to pay high income tax. They could shift their activity to other unregulated overseas trading platforms. In other words, the trading activity could shift underground once again.

What is the recourse, how will all this end?

Governments across the globe, including the US and EU, are working on a framework to regulate private cryptocurrency trading. A global framework — which allows those willing to take risk continue playing in these assets, while protecting the naïve investors — could be ready in a year or two. That is when clarity on the way forward in regulating these assets will emerge. Unilateral ban or regulation of these trades by one country is unlikely to work because the ecosystem is virtual.

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