Budget 2022: Implications of crypto tax regime on common investor

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After months of speculation and waiting, the crypto ecosystem finally has a nod from the Government of India albeit in terms of a tax regime. The early investors are especially rejoicing after years of roller-coaster signals from various authorities in the country. India, now, is unlikely to get a ban on crypto and that is progressive for the nation. The announced tax regime legitimizes the virtual digital asset class (including crypto and NFTs) and paves the way for a formal umbrella of regulations going forward.

While there is enough reason to celebrate as an ecosystem, we take the lens of a common investor to understand the implications.

Taxation appears high

The new tax regime does appear to be a strong whip on crypto trading. With crypto being accorded the highest tax slab for any asset class at 30 percent and the implementation of a 1 percent TDS on bigger trades, investors may feel the pinch if they react to certain market movements with additional trades. However, we do believe that the gains from crypto and NFTs are still considerably high, and a 30 percent tax rate may not discourage most investors. In fact, we see a growth in investor base on account of it being accorded legal status.

Investors need to time trade to optimize on tax

More than ever, crypto investors must time their trades to ensure they optimize their tax liabilities. Because losses can’t be offset with other assets or carried forward, any sale at a loss will be painful for investors. Given the crypto market has considerable volatility, investors need to be patient in juggling both the market and the tax regime to maximize their returns.

Long-term investors need a helping hand

The current regime does not distinguish between short-term and long-term (above one year) investing in the ecosystem. Long-term investing usually has a subsidized taxation policy (or a rebate) as it encourages investors to hold on to an asset for maximising their returns. We do believe that the Government will relook at this in the future.

Bookkeeping will be cumbersome

The Government has given considerable thought to the ecosystem and has entrusted the key responsibility of tracking and reporting gains with the companies and investors. Investors who do thousands of trades across exchanges in a year will have to painstakingly note and record them all to arrive at a tax liability. However, developed nations do have systems and services that do this and hence we believe that services will evolve to incorporate this requirement. We, at Giottus, are already building a product for easing this process to generate easy P&L and tax statements.

Education will be key

There are some nitty-gritties that need to be ironed out and explained for the common investor. Educating them in the right way will be crucial for the success of this tax regime. We also believe that as many investors flock to the ecosystem and the Government gets to understand its functioning better, we will be able to see additional discounts and adjustments being introduced in the tax slabs.

Overall, a welcome development

While the Government has taken a pragmatic approach to ensure that the growth of an ecosystem does come with certain limitations before its wide ramifications are understood, there are many benefits that the ecosystem can realize immediately.

This tax regime along with a virtual digital assets bill, when presented, will legitimize all businesses operating in the country as well as enable consumer protection for investors. Standard regulatory compliance with respect to KYC and AML/CTF as well as tax compliance with respect to TDS and GST will be mandated across companies and may help in weeding out certain bad actors in the ecosystem. Exchanges and related platforms will become the legal gatekeepers of the industry. Along with the digital rupee that is purported to be enabled via the blockchain by RBI, the Indian crypto community can trade with ease as well as with certainty on their investments.

Overall, we believe that the crypto ecosystem along with its businesses and investors are primed for growth in the upcoming future. The Government has already laid the foundation for a thriving and sustaining industry.

The writer is CEO, Giottus Crypto Exchange. Views are personal.

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Vikram Subburaj

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